Q: I understand that the stock market has been weak, but one of my stocks has dropped by more than 40%. Should I get out?
The short answer is: It depends.
Whether you should hold onto an underperforming stock hinges on a couple of factors. First, why is the stock performing so poorly? And second, why do you own the stock in the first place? The answers to these questions can help you make a smart decision.
As a personal example, Bank of America (BAC -2.42%) is one of my largest stock holdings and has lost about 25% of its value since peaking in August.
While there are many factors that influence stock prices, Bank of America's poor performance can be attributed to recession fears and a flattening yield curve. Both of these can certainly weigh on profits, so to be clear, the stock is down for a reason.
However, I bought Bank of America because I thought it is a well-run business that will perform well over the next several decades, not because I thought the U.S. would remain recession-free. None of the downward catalysts are permanent problems, so I have no intention to sell. In fact, if the weakness persists, I may even add to my position.
The point is that while nobody likes to see the value of their portfolio fall, it's important not to panic-sell. In turbulent times, take a step back and assess the reasons for a stock's poor performance and determine whether it still aligns with your long-term objectives.
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