I bought a stock, but it’s going down. What do I do?

Sooner or later, every investor who decides to link his activity with shares, faces a position going into negative territory. It can be a single security with a small share in the portfolio, or several shares at once, as a result of which the value of the portfolio at the moment becomes quite different from what the investor would like it to be. At this point, the question arises: “What to do with the cheapened paper now?”

You can quickly get rid of a bad investment by locking in a loss and limiting yourself from further risks. You can patiently wait for the price to recover and continue to believe in the security. Or you can buy more at an attractive price to increase the potential yield.

Unfortunately, it is impossible to give one piece of advice for all cases. Each case will have to be dealt with individually. Here is a list of things that need to be considered in order to make an informed and appropriate decision in such situations.

Serenity
“Some people should not own stocks at all because price fluctuations can drive them crazy. If you’re going to panic and do rash things when the stock price starts to fall, it’s better to give up investing right away” – Warren Buffett.

Emotional pressure can make it very difficult to make a rational decision. First of all, take a deep breath in and out. Understand that there is life beyond the market, that money is not an end, but a means, and that no matter how the situation turns out, you will definitely have a chance to earn, self-actualize and achieve your goals.

Physical activity is a good stress reliever. A couple of hours in the gym, a few laps around the stadium or just a good physical training complex at home will get rid of the desire to “urgently do something”, which usually leads to nothing good.

Note. When you are calming down, you should not go overboard with the “front 100 grams”. Alcohol relieves stress by narrowing perception, which negatively affects the quality of analysis, and also upsets the nervous system. And certainly, you should not make any decisions in such a state.

Think back to why you bought this particular stock and what has changed since then
What time horizon are you working on? If you are working on a time horizon of a few days to 2-3 weeks, it’s probably time to get out of a bad trade.

What is your trading plan? Where is your stop loss? If there is no answer to these questions, the best solution is usually to close the position “as is”. This is especially true when trading with leverage.

If you are a long-term investor and initially expect to hold the stock for 1.5-2 years or more, first assess whether there is a risk to the integrity of the company. How likely is it that the company will go bankrupt because of the problems that have arisen? If no significant threat is apparent, then take your time and give yourself and the market time to reassess the situation. Price fluctuations are an inherent feature of stock investing. If a company is stable and efficient, its stock is likely to rise over the long term, despite temporary drawdowns.

The longer your investment horizon, the more relaxed you should be about temporary drawdowns. The tactic of building up a position at lower prices is often an effective solution in this case. Of course, if the company remains fundamentally strong.

In general, at this stage, try to answer the following questions:

Are the positives that made the paper worth buying still valid?

Did one stock go down or did the whole sector suffer? Which companies declined the most and why? What do the stocks in your portfolio have in common with them? Is it possible that the stocks sold off just “for the company”?

How have/ will prices for raw materials and/or products and services of the company change? How is the company affected by the currency factor? How has/ will the financial performance change? Are profits likely to fall and by how much? How have dividend expectations changed?

How much does the deterioration in fundamentals generally correspond to a price decline? How will industry/market multiples change? How long can negative factors remain in force?

The answer to these questions will allow you to form a more detailed idea of the nature of the decline. Try to take into account as many factors as possible at this stage and compare them with what you had at the time you opened the position.

Ask yourself the question, if you did not have these securities in your portfolio, would you open a position in the current situation on the fallen stocks?

What did you get wrong?
What did you fail to consider when buying the stock? In what conclusions were you wrong? It is always unpleasant to admit your mistakes, but their denial opens a direct road to losses. Very often it is not the confusion of the situation that prevents you from making a decision, but the unwillingness of the investor to admit that he or she is wrong. Try to honestly recognize your mistakes and form a new vision on the declining assets.

What’s going on with the graph?
You should study the chart carefully only after you have formed a more or less clear fundamental picture for yourself (does not apply to short-term speculative ideas). The view of rapidly declining quotes sometimes paralyzes you and does not allow you to evaluate the situation soberly. Not having your own formed opinion, your brain will start evaluating the situation by the behavior of other players, who sell out shares en masse at a loss. At the same time, the worse the price for exit is, the stronger will be the desire to close the position and fix the loss.

What really matters on the chart are the following points:

What was the company’s operating and financial performance when it was at these prices last time? Is the P/E ratio and other multiples better or worse now?

What price levels have been passed? What is the probability that the sell-offs are due to margin calls rather than deliberate closing of positions by participants?

Has volatility increased or are wide price swings normal for the stock?

What is the global picture? Maybe the stock is trading in a wide sidewall and is now just in its lower part? What other benchmarks can investors and speculators use?

Specific action plan
Now that the situation with the sagging asset in your portfolio is clear, it’s time to consider specific actions.

If you decide to keep the stock in your portfolio, consider whether to grow the position at more attractive prices. Does it fit your strategy and risk management? How much can you buy to avoid exposing your portfolio to excessive risk?

Do not forget about your investment niche. With increased volatility (if any), it is tempting to speculate a bit on broad price movements. If you change your trading rules on the fly, you may get confused and end up exposing your portfolio to excessive risk.

Try not to think in terms of individual stocks, but in terms of the return/risk of the entire portfolio. What will happen to your portfolio if the decline continues? How will it affect your psychological state? How will you act further?

Don’t forget to compare with alternatives. Perhaps there are more interesting ideas in the market today and it is worth considering adding a new asset to your portfolio.

If you decide to get rid of cheap paper and reduce your risk, choosing a replacement is also important. Immediately assess where you can invest the freed-up funds. If at the moment you do not see interesting ideas on the market and do not want to increase the share of the existing securities, you can simply buy the shortest OFZ. It will be more profitable than keeping money in cache. And when a suitable opportunity arises, you can quickly sell them due to their high liquidity.

In conclusion

Sometimes the sight of a losing position is paralyzing and you just want to close the terminal and wait for everything to work itself out. Sometimes this is a really good decision, but it should be conscious. If you have closed the terminal, but your thoughts keep coming back to the problematic paper, ask yourself: “Have I really decided to keep this investment or am I just afraid to make a decision?”.

You should ask yourself the same question before you hit the “sell” button. Such honesty towards yourself will help make your investment journey much more successful.

“We don’t have to be smarter than others we have to be more disciplined than others” – Warren Buffett.