When the stock market crashes it impacts people in different ways. Nobody likes seeing their net worth drop — even if it’s just on paper — and it’s very tempting to want to stop the bleeding and sell your holdings.
That’s an understandable impulse. When you see your stocks lose value, it’s easy to think about selling them simply to stop the bleeding. You can’t lose any more money if you sell, but that’s a very risky attitude.
Nobody knows when the market will reach bottom and the bottom may not happen at the same time for every sector. If you own stocks you believe in over the long-term, selling now so you can buy at a lower price later puts you at risk of selling, then having to pay a higher price to buy back in.
Stock prices go up and down for reasons that often have nothing to do with the strength of that particular company. Walmart (WMT) – Get Walmart Inc. Report stock, for example was down about 23% year-to-date as of mid-day June 16. That’s because retailers have broadly warned about higher costs and lower profits.
But, do you believe Walmart will stop being a good business because of these issues? The reality is that lower-cost retailers with huge buying power will likely add customers during an economic downturn (and keep some of them when things improve). A falling stock price is often not a sign that something is wrong and it’s almost never a reason to sell a stock you have long-term faith in.
Why Is This Stock in my Portfolio?
The question you need to ask yourself about every stock you own is “why is this company in my portfolio?”
Ideally, you would have asked that question before you purchased the stock, but if you didn’t, you should ask it now. What you do depends upon your answer.
If you answer, “I bought this because I heard on social media that this stock was going to go up,” well you have some homework to do. In this scenario, you need to research the company either on your own or by seeing what professionals think. Be careful when looking at analyst reports from people who are focused on short-term movements.
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They are often wrong as predicting short-term stock movements is like betting on what the score of an NBA game will be in the middle of the third quarter. Instead, look for analysts who have a long-term view of the company or dig in yourself then ask the question, “do I believe this business will continue to be stronger in the future than it is right now?”
If you believe that’s the case, then the current stock price does not matter. Chipotle (CMG) – Get Chipotle Mexican Grill Inc. Report shares dropped significantly for over a year during the company’s e. coli scandal. Long-term investors looked at how the company handled the issue (aggressively) and made a decision as to whether they believed the damage would be repaired (it was).
Selling your Chipotle shares would have been a mistake as Chipotle has roughly tripled since its lows during the crisis.
And, of course, if you bought a stock because you believed in the company, ask yourself what has changed? The pandemic, inflation, and supply chain issues have exposed some companies as not being as strong as many thought. If you own shares of a company you think has large flaws you did not see previously, it may be time to sell.
If, however, a good company is struggling due to relatively short-term economic concerns then you almost certainly don’t want to sell.
We Don’t Know Where the Stock Market Bottom Is
As an investor or even as a trader, it’s important to take the financial advice you see on TV for what it is — hot takes designed as television entertainment. Nobody puts you on TV to say “stay the course,” or “buy great companies and hold them for a really long time.”
The only advantage the individual investor has is time. You don’t have access to the same information as the hedge funds and institutional traders.
A market crash or a bear market is an opportunity to add good companies to your portfolio at cheaper prices. Be a regular buyer during times like this and your cost basis for each company goes down.
Tune out the noise of the day. Stop trying to time the market — it doesn’t work. Remember that you’re investing for your future, perhaps for retirement, not for today. Losses and share price drops only matter when you sell and if you believe in the long-term prospects of the company’s you own, you have nothing to fear.