Here’s What To Do If Your Favorite Stock Is Crashing personal Finance

(Daniel Folber)

Investors have different risk tolerances, time horizons and sector preferences. But chances are, you have a particular stock or two that you’ve owned or plan to own for a while.

But as large swathes of the market see double-digit declines in 2022, what should you do when a company you thought was a savior dips into the red? Here are strategies you can use when a top stock, or one you were particularly confident about, sees great loss,

Image Source: Getty Images.

Revisit why you bought the company in the first place

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The stock market has historically been an excellent engine for 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 hard assets like real estate. However, this liquidity can make it attractive to buy or sell when volatility increases.

When a stock is crashingIt is important to remember why you invested in the company in the first place. as heroine (NASDAQ:AMZN) The stock fell to a 52-week low at its peak from its split-adjusted price of $188 per share, which was slightly above $100, with many investors panicking and rushing to exit during that short period. Amazon Web Services (AWS) growth was likely to slow After an unprecedented 2020 and 2021, and Amazon was struggling to turn a profit on its home e-commerce business as labor and fuel costs slipped to its bottom.

However, it’s unlikely that a long-term investor in Amazon bought the stock simply because he expected its 2022 results to be better year over year. A more likely investment thesis would revolve around a bet on AWS’ high-margin growth as the cloud industry continues to grow and become an essential part of the modern-day enterprise. It can also bet on e-commerce and streaming via Prime Video and Twitch.

By revisiting why you bought a stock in the first place, it’s far easier to resist the temptation to sell when it’s big on a single earnings announcement. With Amazon stock rising more than 10% last Friday in response to a solid 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 it requires good discipline and patience to get out of any volatility.

Determine whether the sell-off is valid

The rapid sell-off and sharp uptick may seem shocking to new investors, who may question whether a company like Amazon is really worth hundreds of billions of dollars less today than it was a year ago. At times like these, I like to think of a lesson from Morgan Housel’s book, psychology of Pennies. The lesson is to know what game you are playing. The stock market is a playground on which many different games are being played by many different types of investors. If you’re a short-term trader who cares more about quarterly results than a five-year strategic plan, missing company guidance is a big deal. However, a more effective strategy is to find companies that can be successful in the long term and Let those companies earn money over time,

In this sense, a stock’s price may be worth falling while the drivers behind that sell-off have nothing to do with why you own the stock in the first place. For example, Procter & Gamble (NYSE:PG) The stock fell as much as 7% on July 29 due to loss in earnings and rising costs. However, the company’s cash flow, market position and product mix enable it to pay and increase its dividends and share buybacks in the long run. P&G is a classic example of a stock that might have deserved to fall because its quarterly results were below-expected. But the drop in its share price may have been largely meaningless to shareholders who chose the stock as a multi-decade passive income stream Or to supplement income in retirement.

Think about what might happen next and how you would respond

Another good strategy to implement if there is a stock you like is to plan what to do next. If it keeps falling, will you buy more? If not, what will it take for you to buy more? If the company’s problems persist in the coming quarters, how will this affect the long-term investment thesis? Are the issues pressing the stock a symptom of a short-term headwind or a bigger problem?

By asking these questions ahead of time, an investor stands 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 market Can be intense and stressful for even the most experienced investors. But investing is all about finding companies that meet your specific objectives, whether it is to grow, generate income, provide a good value, etc. By revisiting the fundamentals, you can give you the necessary preparation and confidence to make the best decision for your portfolio. and your financial health.

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John McKay, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Daniel Faulber Have no position in any of the stocks mentioned. The Motley Fool has Amazon status and recommends it. The Motley Fool has one Disclosure Policy,

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