One of the unfortunate facts of investing is that sometimes stocks don’t move in the direction you’d like.
Sometimes companies – even those that seem like great investments – see their share prices drop. Sometimes sharply. Sometimes for extended periods.
Here are three things to keep in mind when your stock is plummeting:
Defuse your emotions
Watching a stock you own falling steadily is not fun. It can be frustrating, confusing, even scary.
But making an ill-informed “I’ve had enough” decision based on an ugly couple of weeks, months, or even quarters might only be a way to lock in your losses … and bitterness.
Motley Fool member Fuskie shares a key that allows him to keep from fixating on share price – and making unfortunate short-term decisions based on share-price frustration.
“I don’t invest in stocks – I own companies – so the stock price isn’t as important to me as the business operations of the companies,” he wrote. “If I had sold Netflix when the price dropped 50% during the Qwikster fiasco … I wouldn’t have a 15-bagger now.”
Do your research
That’s not to say you should never sell. Far from it.
But make sure it’s an informed decision. Check our discussion boards to find out what others are saying about the company. Take a look at CAPS and see how our community rates the stock. Read our articles on Fool.com to find out if there are red flags that indicate a sale might be your best course of action. If you’re a member of our premium services, see if the analyst team has advice.
Most of all, recall why you made the purchase in the first place. Does the business case still hold, or has something fundamentally changed? Are executives fleeing the building? Has your company watched idly by as a new technology surpassed its primary product (hi, Kodak!). If so, it might be time to depart.
But if your investment thesis still holds, it could be an opportunity to increase your investment.
Remember perspective … and diversification
That said, if a stock is keeping you up at night, it’s not in your best interest to buy more.
If you’ve thought or said something like, “DDD is killing me!” or “INVN’s drop is devastating my portfolio,” there’s a decent chance you’re overweighted in that stock.
As Fool co-founder David Gardner wrote in response to that particular DDD comment, “If any single stock is causing anyone serious angst, my best advice would be to ensure you are diversifying away from that stock.”
The fact is that sometimes stocks fall. How you deal with it will largely determine your financial future.
If you’d like to check to see if our Stock Advisor service has something to say about a company in question – or if you want access to a wide range of market-beating alternatives – we’ve arranged for a free, seven-day, no-risk trial for you. Click the link to try Stock Advisor for free.