Stock market drops can be very unnerving – you open your portfolio and serious money is ‘missing’ from what was there the day before.
So what should you do? Sell, Hold or Buy.
Some people would say ‘buy the dip’. While some others, would rather ‘sell to buy back’ when the conditions improve. And some would do ‘nothing’ and just hope the stock recovers.
I think a lot people would go with the second option and save their money from getting swallowed by the market.
However, all three options are valid and should be on the table.
As such, the first step to be taken is to dimension the reason for the decline and put it in perspective.
You want to ask a few questions –
Has anything changed with the economy or the company or in geopolitics?
Has anything changed with regards to their product or competition or consumer preferences?
These questions should help you answer the ultimate decider – If you were considering buying the stock for the first time at it’s current price, would you buy it or sell it.
Sometimes, there’s a genuine reason a stock price is falling and ‘buying the dip’ is nothing but catching a falling knife.
Sometimes, the reason for the fall is temporary and the stock would most certainly recover. Then you can buy the dip, if it has fallen to a sufficient level or just hold until the stock drops to an appropriate level.
So why not sell to buy back?
You have no way of knowing when the market will bounce back. And missing out could be double jeopardy – you sold the stock at a loss and you also don’t have any stock again which would benefit from the recovery.