When to Hold Losing Stocks

Often Investors Sell Losing Stocks at the Wrong Time

Computer screen displays laptop graph of financial trends.
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With stocks, volatility can sometimes be significant or even alarming.  We are only human, so when you are looking at a 20% or 45% loss, your instinct might be to sell.

Sometimes, that would be exactly the right thing to do.  However, there are plenty of times when you would be well served to hold on, even if it is just for a little bit longer.

First of all, you should never let a situation deteriorate to the point of being down more than 15%, assuming you are observing loss-limits, which I always recommend.

 However, it is not always possible to stand by such a strategy (immediately selling your losing investments), so when your shares are down, what are you to do?

Here are some pointers.  Give each one some consideration before you dump those shares!  That way you will make a more informed decision, and have increased clarity of whether you should sell, or not.

Thin Trading  

If the shares fell on light trading volume, the move is highly likely to reverse, and probably pretty quickly too.  For example, if a stock trades 500,000 shares a day on average, and then dips 25% on only 100,000 shares one day, that price will recover when trading activity returns to normal... usually by the next day.

Fresh Eyes

Ask yourself if you would buy the shares if you just found out about the company for the very first time.  Often the reasons which originally attracted you to the stock are still in place, and besides the disappointing share price performance, the investment is as solid as ever.

Another tact at this same concept involves getting a second opinion.  If there is someone you respect, who is knowledgeable about the stock market, why not get their opinion.  You may be surprised by the types of answers they come out with, and your decision may ever be reinforced, or possibly changed.

Patience

Remember that buying a share of a stock is buying a slice of the underlying business.  Companies take time to grow, and often many quarters (3 month periods) will pass before a business establishes themselves.  

Don't let the immediate nature of the stock market fool you - patience is required with most investments.  Selling too early from frustration, or at the first sign of a troubled share price, almost always costs shareholders (or more accurately, "share sellers").

Remember, despite a dozen outlier stories and myths about overnight riches, investments take time to grow.  It even applies to the big ones you've heard about, like Microsoft and Apple, both of which made many wealthy investors, but also which took years to get there.

Fundamentals Trump Emotions 

Make sure that any decision you make is NOT based on impatience, greed, frustration, fear, or anger.  The good news is that almost every one of these potential emotions can be removed simply by waiting a day.  You've heard the expression, "sleep on it."  Well, this is what they were talking about.

Every trade decision should be based on the fundamentals of the underlying business.  Are they still gaining market share, reducing costs, expanding revenues, and developing their products?

 

Assuming everything is still on track, selling your holdings might be a poorly timed decision.  Wait a minute - how do you know that everything is still on track?  Simple solution, just call the company and ask.