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You log onto your brokerage account, or maybe a site like Mint, and discover that one of your stocks took a beating today. Maybe it was down 10% on news of a recall. Whatever the case may be, the real question is what should you do?
Do you buy more, do you sell, do you just hold onto the position you have? Here are some factors that you should consider when deciding what to do.
Buy More When Stock is Down
Many experts will tell you to buy more when a stock is down. This can be good advice, with the following big caution: why is the stock down?
Ask yourself, why did you buy this stock to begin with? Did you like the fundamentals of the business? Did the company have an awesome competitive advantage compared to it’s peers? If so, does the reasons you bought the stock still apply?
If the reasons that you bought a stock still apply, the you may want to consider buying more since you are getting a better price than when you first looked at the stock. Some common examples of why a stock may take a beating, but the business model doesn’t change, includes product recalls and natural disasters (think Japanese Tsunami). If you believe that the company can weather the short term storm, a buy on the down day may prove to be a great return in the end!
Sell Your Positions Now!
One of the first instincts when a stock takes a bath is to sell, and sell quickly! While this isn’t usually a good thing to do, there are some circumstances to consider selling. If the company is on the verge of bankruptcy, you should get out of your position. In bankruptcy, equity holders almost always lose.
Some other things to think about when looking to sell include the business model and corporate governance. Did the company suddenly lose it’s competitive advantage (think Monsanto and Chinese competition)? Did an accounting scandal just come to light (think Enron, which led to bankruptcy)? If something major changes in these areas, you should strongly consider selling your shares.
Ride It Out
Most of the time, however, you should probably just ride out the ups and downs. If nothing major changes, why buy or sell? Many times, stocks fluctuate with the entire market regardless of any company-specific news. However, if it goes down tremendously (think financial crisis) and there were no underlying business changes, you may want to invest more. However, just always be looking out for changes to your stock’s business. Those changes are what cause shareholders to take a beating.
Readers, when your shares are down, do you buy more, sell, or ride it out?
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This post was written by...
Robert – who has written 317 posts on The College Investor.
Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.
{ 16 comments… read them below or add one }
Very well written and I agree completely! I think that so long as it is temporary and the original reasons you purchased still apply, than buy, buy, and buy some more. This is when dollar cost averaging comes into play
Dollar cost averaging works great over the long run!
The answer to your question is, “It depends”, for the reasons you stated. Since I primarily invest for dividends I don’t worry too much about price fluctuations. I only worry if it seems like the stock is in a tailspin that it won’t recover from.
Tailspins can be beneficial though – think financial crisis and look how most bank stocks have recovered since the big dip in 2007.
I totally agree – if the stock is down because of some short term event you might as well buy more and bring your cost basis down. Trade on fundamentals, not news.
Great point – fundamentals are what matters.
I set my up on automatic. But I agree research is very important.
In most cases I do agree that you should buy, buy, and buy some more when a share is at a discounted price. After all, doing research before forking over the investment, which should be an indicator to trust your instincts to buy more while you can.
I routinely (monthly) dollar cost average into the market. I am in when the market goes down and up. I check my asset allocation annually.
I actually say no – dollar cost up and continue to buy companies as they grow. AAPL would be a great example of this. BAC is a perfect poster-child for why buying on the way down when the fundamentals are bad doesn’t work.
I should be in the “in depends” camp, because obviously why a stock has dropped makes a difference. But the reality is that I buy on a schedule, so it doesn’t really factor into it for me unless I’m purposefully making a bet for fun.
If you invest on a schedule, you are almost automatically dollar cost averaging into your shares anyway.
I buy more when my ETF and index funds are down. I usually do not buy more individual stocks when the market is down. I’m always afraid that it will drop further.
i gotta say am one of the people that would actualy follo their first instinct and sell , in fair to loose more
If I have money and shares are down, I prefer to buy more. Depending on the company specific situation, I may want to sell a stock off.
I’m in agreeance with this post. Good advice and well written. Thanks.
-Ashley Morrissey
ashleymorrissey90(at)yahoo(dot)com