When stocks start dropping several things might start happening. Firstly, you’ll see other investors pulling their money out, which is concerning enough. To add to this, you might have media hype and hysteria, along with a sudden psychological urge to follow the field. Here’s how you should approach making decisions on your investments when the stock you’ve invested in shows signs of heading south.
If you sell when your stock starts going down, you may be selling at a simple fluctuation point. While on paper you have a loss at this point, it only becomes a loss once you make it real and actually sell the stock.
Once you do this, there’s definitely no chance you’ll make the money back. When you invest in the market, it’s important to bear in mind why you’re investing in a particular stock. The suggestion we give is to only sell if something fundamentally impacts the reasons why you invested in the first place. If nothing has really changed, then despite a price dip, you’ll be better off having a longer-term view of where the stock is headed and acting based on that.
Although it’s impossible to predict the future, studies have shown that stocks have historically increased year-on-year over the last eight decades. Of course, this contains some bad years where prices actually went down – but if investors held on to their stocks, they would have done better in the future.
You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.
- Peter Lynch, American Investor & Philanthropist
Naturally, there will be times when you will make the right decision to sell. Perhaps you’ve realised that your portfolio is unbalanced and you need to tweak some things around. Or you may have stocks in a single company that is suddenly looking like it is really going to struggle. In these circumstances, it definitely makes sense to sell.
Different funds will have different focuses, whether it’s on a sector, a country, or a region. If you feel that the long-term outlook has significantly changed for this fund, it may be worth getting out here too. But most of the time funds offer a less risky alternative as they spread the risk out across different companies.
To help avoid this scenario, aim for broad diversification with a variety of assets and asset classes, including stocks, bonds, developed economies and emerging economies. Tweak this as you go along and you should have an investment strategy that gives you confidence for the future.