Investors have different tolerances for risk, different time horizons, and different sector preferences. But you likely have one or two stocks that you’ve been holding for a while or plan to own for a while.
But with swathes of the market seeing a double-digit drop in 2022, what should you do when a company you thought was a goalkeeper dips into the red? Here are some strategies you can use when a big stock, or one you’ve been particularly confident in, sees big losses.
Rethink why you bought the company in the first place
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The stock market has historically been an excellent driver of wealth creation over time. It is a global market with a large pool of buyers and sellers, which makes prices well known and gives stocks an element of liquidity unmatched by fixed assets such as real estate. However, this liquidity can make buying or selling tempting when volatility is high.
When a stock goes down, it’s essential to remember why you invested in the company in the first place. as such Amazon (NASDAQ: AMZN) The stock fell from its adjusted split price of $188 per share at its peak to a 52-week low just above $100, and many investors panicked and ran for exits during that short period. Amazon Web Services (AWS) growth is likely to slow after a massive 2020 and 2021, and Amazon has been struggling to turn a profit from its homegrown e-commerce business as labor and fuel costs slashed in its bottom line.
However, a long-term investor in Amazon is unlikely to buy the stock just because it was hoping its 2022 results would outperform year-over-year. The most likely investment thesis will revolve around betting on high margin growth for AWS as the cloud industry continues to grow and become an essential part of the modern day enterprise. It can also be an e-commerce and broadcasting bet via Prime Video and Twitch.
By reconsidering why you bought the stock in the first place, it’s much easier to resist the temptation to sell when it’s big in one earnings announcement. With Amazon stock showing more than 10% last Friday in response to a strong second-quarter earnings report, it’s easy to say the stock was a buy in hindsight. But at the moment, the situation is much less certain and requires a great deal of discipline and patience to weather any fluctuations.
Determine if the sale is correct
Sharp selloffs and sharp spikes can seem baffling to new investors who may wonder whether a company like Amazon is hundreds of billions less worth today than it was just a year ago. At times like these, I like to think of a lesson from Morgan Haussell’s book, psychology money. The lesson is to know what game you’re playing. The stock market is a single playground in which many different games are played by several different types of investors. If you’re a short-term trader who cares more about a quarterly outcome than a five-year strategic plan, the company’s lack of direction is a big deal. However, the most effective strategy is to find companies that can succeed in the long term and allow those companies to double their wealth over time.
In this sense, the stock price may be worth the drop, while the motives behind this sale have nothing to do with why you own the stock in the first place. for example, Procter & Gamble Company (NYSE: PG) The stock fell as much as 7% on July 29 due to lost profits and higher costs. However, the company’s cash flows, market position and product mix make it more than capable of paying and increasing its dividends and share repurchases in the long run. P&G is a classic example of a stock that may have been worth a dip, because its quarterly results didn’t live up to expectations. But the drop in its stock price may not make much sense for shareholders who have chosen the stock as a passive income stream for several decades or to supplement income in retirement.
Think about what might happen next and how you will respond to it
Another good strategy you can implement if a stock you like falls is to plan what to do next. If it keeps falling, will you buy more? If not, what would it take to buy more? If the company’s problems persist in the coming quarters, how will this affect the long-term investment thesis? Are the problems pressing stocks likely to be short-term headwinds or symptoms of a larger problem?
By asking these questions early on, the investor has a better chance of making a calculated decision when volatility is high, rather than falling victim to impulsive reactions.
Zoom out and focus on what matters most
Bear markets can be severe and stressful even for the most experienced investors. But investing is about finding companies that meet your specific goals, whether it’s to grow, generate income, deliver good value, etc. By revisiting the basics, you can give yourself the preparation and confidence needed to make the best decision about your portfolio and financial health.
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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Daniel Foelber has no position in any of the stocks mentioned. Motley Fool has and recommends positions at Amazon. Motley Fool has a disclosure policy.