If you’ve been dipping your fingers in the market, you’ll likely have been through the misfortune of picking poor-performing investments from time to time.
It’s something that comes with the territory. While stocks have the potential to net you impressive gains, the opposite is also true.
Although the general consensus is to invest and hold stocks for the long term in response to volatility, it’s not as easy as it really sounds.
In actual execution, investors will likely face a multitude of feelings and inputs which are largely unpracticed and unexpected.
These factors can cause a inexperienced or unprepared investor to commit to a rash or poor quality decision, causing a financial loss, and also ending up in a worst position afterwards.
In this article, we’ll like to share some tips with readers on how to engage with and make a decision on a non-performing investment. This will help investors navigate troubled waters better.
If you have a low tolerance for risk, it can be tempting to sell off your stocks when the market drops. This is a common reflex when the financial value of stocks dip due to external factors or bad news.
Instead, it would be more prudent to take a deep breath and refrain from making any decisions in haste, as sensible results rarely emerge from such rash actions.
In truth, volatility is a foundational element of equity investments, which investors should learn to accept and manage as part of their investment journey.
Rather, we should look to such experiences to figure out our individual risk tolerances so as to manage it more sensibly for future encounters.
Review The Base Plan
Because share prices are based on the market’s perception of their underlying business performance, they tend to undergo big price movements especially when there is significant news inputs.
Instead of immersing yourself in such rumors or hearsay, it would be more grounded to reassess your investment based on it’s initial investment thesis.
Is the company’s business model affected? Does it still have a strong or increasing market share? Is it’s total revenue or profit margins improving?
Reviewing the base plan would allow yourself to be more objective about the actual business performance, and not be swayed by inconsequential factors which do not affect the business.
This action can prevent you from making rash decisions and dumping a solid long-term investment due to hearsay or immaterial factors affecting the business.
It also provides decisive and clear reasons to part ways with a stock, if critical aspects of the investment are identified to be going south.
A commonly overlooked pointer when investors decide to drop an investment is that, are there alternatives or assets which their freed-up capital can flow to?
With inflation and the cost of capital constantly eating away at your cash, it’s important that we identify other suitable assets to deploy our capital into if we choose to withdraw from an investment.
It’s not wrong to keep your money as cash in bank for periods of time, but that might not be a ideal solution in the long run as over time it’s purchasing power will decrease.
You might even choose to flow your capital between different asset classes such as crypto, bonds, and property. The main point we are making is that there should be an awareness or plan for utilizing said capital.
Ignore Sunk Costs
Sunk costs are defined as financial costs which have already been incurred or lost in the process of an investment, and cannot be recovered.
This leads on to the sunk costs fallacy where an individual chooses to continue a investment or endeavor as a result of previously invested resources such as financial capital.
A common example would be investors who continue to “average down” a company’s shares despite knowing that the initial thesis is flawed, hoping to break-even the investment.
This is a undesirable behavior which readers should be aware of and refrain from committing as it merely puts more and more of their capital at risk.
Remember The Lessons
When it’s all said and done, remember to unravel the whole experience and any mistakes and decisions you made along the way.
These pointers are important lessons which investors should definitely internalize and absorb as similar situations might arise in the future.
With an accumulated knowledge base and experiences, readers will be more prepared to handle market fluctuations and other difficult situations as they arise.
Readers can consider to create and maintain a investment journal which should provide details on previously encountered scenarios and mistakes. This journal can be updated from time to time as new inputs come in.
Such a practice will help us to better internalize such episodes, and help us in our decision-making process for the future as well.
As savvy investors will know, the stock market can be truly unpredictable from time to time, being at the mercy of various external forces.
When we choose to invest in equity instruments, we should understand this, and view dips in the market from an objective angle, and also a pinch of salt.
By understanding and applying the above mentioned notions, investors should be able to make better decisions when it comes to managing losses, and also prevent themselves from being caught in similar situations as well.