Your stock portfolio might look pretty ugly right now. The coronavirus pandemic has hit the market hard, creating all sorts of uncertainty and causing people to doubt their investment choices.
That's understandable. Nobody likes to see a sea of red ink or find out their retirement portfolio has dropped by a staggering amount. Looking at the numbers can make you want to sell, cut your losses, and move on.
Don't do that. Now is the time to be steadfast, evaluate your portfolio, and maybe even make some purchases.
Why is selling stock now a bad idea?
You haven't made or lost money on a stock until you sell it. That doesn't mean you should never sell a stock that's down, but you have to consider why a stock's price has fallen. In the current situation, it's important to remember that share prices have fallen for many companies that are either still thriving (like Walmart and Amazon) or may be losing sales now but will likely rebound quickly (Starbucks comes to mind).
So, as you examine your portfolio during the coronavirus pandemic, ask yourself the following questions about each stock you own:
- Did the pandemic hurt this company's ability to thrive again once the pandemic is back under control?
- Has consumer behavior changed in a way that endangers the long-term survival of the company?
For the first question, maybe you believe that a retailer like Macy's had a decent chance of making a major turnaround. Perhaps you now believe that the odds are against that, and that the retailer won't have the cash to complete its transformation, or that customers will be slow to return to the higher-priced retail chain.
When it comes to the second question, be wary about being too pessimistic. But if you truly believe that people won't be willing to take cruises for years rather than months, then you may not want to own cruise line stocks, even if your shares are down by 60% or 70%.
It's time to sell when you believe that shares have fallen for valid reasons that won't be fixed anytime soon, or maybe ever. When you lose faith in a company, that's time to part ways -- even at a loss.
One recent example is Luckin Coffee, the Chinese coffee chain that recently admitted its COO fabricated some sales numbers. That caused some investors to lose their trust in the brand and sell their shares. Others still believe in the company's long-term vision and held, even though the road to success looks much longer.
Neither decision is wrong. Either choice can make sense depending upon how you process the news.
Know when to hold 'em
Many strong companies have seen significant drops in their share prices because the current situation looks bleak. Many of these brands will eventually recover, and the strongest companies should (at some point) beat their 52-week highs and then hit go even higher.
Don't sell out of fear or to cut your losses. Evaluate your holdings and walk away from any stocks that fail the criteria above. Aside from that, remember that you're an investor, not a trader, and that markets tend to go down fast but recover slowly. Historically, though, they have always recovered.
We don't know the timetable (and anyone who tells you they do is probably selling something you don't need). What we do know is that history has shown us that patience will eventually be rewarded.