Here’s what to do if your favorite stock plummets | Personal finance
Investors have different risk tolerances, time horizons and sector preferences. But chances are you have a particular stock or two that you’ve owned for a while or plan to own for a while.
But with large swathes of the market seeing double-digit declines in 2022, what should you do when a company you thought was a gatekeeper plunges into the red? Here are some strategies you can use when a leading stock, or a stock you were particularly confident in, suffers big losses.
Review why you bought the business in the first place
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The stock market has always been a great engine for building wealth over time. It’s a global market with a large pool of buyers and sellers, which makes prices well known and gives stocks an element of liquidity unmatched by durable assets like real estate. However, this liquidity can make it tempting to buy or sell when volatility is on the rise.
When a stock plummets, it’s critical to remember why you invested in the company in the first place. As Amazon (NASDAQ: AMZN) As the stock fell from its adjusted price of $188 per share at its peak to a 52-week low just above $100, many investors panicked and raced for exits during this short period. Amazon Web Services (AWS) growth was likely to slow after a phenomenal 2020 and 2021, and Amazon was struggling to turn a profit on its home e-commerce business as labor and fuel reduced his results.
However, a long-term Amazon investor is unlikely to have bought the stock simply because they hoped their 2022 results would outperform year-over-year. A more likely investment thesis would revolve around a bet on high-margin growth for AWS as the cloud industry continues to grow and becomes an essential part of modern business. It could also be a bet on e-commerce and streaming via Prime Video and Twitch.
Revisiting why you bought a stock in the first place makes it much easier to resist the temptation to sell when it hits big on a single earnings announcement. With Amazon stock jumping more than 10% last Friday in response to a strong second-quarter earnings report, it’s easy to say the stock was a buy in hindsight. But at the moment, the situation is much less certain and requires a lot of discipline and patience to overcome any volatility.
Determine if the sale is valid
The massive sell-offs and surges can seem baffling to new investors who may wonder if a company like Amazon is really worth hundreds of billions of dollars less today than just a year ago. At times like these, I like to think of a lesson from Morgan Housel’s book, The psychology of Silver. The lesson is to know what game you are playing. The stock market is a playing field on which several different games are played by several different types of investors. If you’re a short-term trader who cares more about a quarterly result than a five-year strategic plan, then a company lacking guidance is a big deal. However, the most effective strategy is to find businesses that can be successful over the long term and let those businesses accumulate wealth over time.
In that sense, a stock’s price might be worth falling, while the drivers of that sell-off have little or nothing to do with why you own the stock in the first place. For instance, Procter & Gamble (NYSE:PG) shares fell 7% on July 29 on missed gains and rising costs. However, the company’s cash flow, market position and product lineup make it more than capable of paying and growing its dividends and stock buybacks over the long term. P&G is a classic example of a stock that probably deserved to fall because its quarterly results fell short of expectations. But the drop in its share price may be largely meaningless for shareholders who have chosen the stock as a source of passive income over several decades or to supplement their income in retirement.
Think about what might happen next and how you would react to it
Another good strategy to implement if a title you like drops is to plan what to do next. If it continues to fall, will you buy more? If not, what would it take to get you to buy more? If the company’s problems persist over the next few quarters, how would that affect the long-term investment thesis? Are the issues pressing the stock likely short-term headwinds or symptoms of a bigger problem?
By asking these questions in advance, an investor has a better chance of making a calculated decision when volatility is high, rather than being the victim of knee-jerk reactions.
Zoom out and focus on what matters most
Bear markets can be intense and stressful for even the most experienced investors. But investing is all about finding businesses that meet your specific goals, whether that’s to grow, generate income, offer good value, and more. By revisiting the fundamentals, you can give yourself the preparation and confidence to make the best decision for your portfolio. and your financial health.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.