Thursday, February 18, 2016

What should you do when your profitable investments also go down with the crashing market?

I answered this question on one of the social media websites. I am posting it here to my trading blog for archiving this advise.
Like for most questions in stock market, my answer is, it depends.
Let me try to answer your question as objectively as possible.
1) First, you need to know what kind of investor you are. If you are research oriented value investor, you would have some idea about the target price or value of the stock. You sell the stock, when it has reached your target price. You care less about the market. Market has its up and down. To sell an attractive investment due to drop in market is not a good reason to sell. You sell if there is some company specific bad development or some parameters have changed in your stock price model.
If you are a momentum driven investor, you ride a stock as long as it goes up. For the exit, you should have some mechanical criteria. As an example, you may want to sell a stock at the stoploss level you decided when you entered the position, or you ride it as long as it goes up but sell it when it drops say 10% from the high price.
2) Every year, there are few sell offs where market drops 10 to 20% and than it would rebound back over next few months. Every few years, there will be a sell off which would be real and it can take most stocks or market indexes years to get back to. Remember dot com bust in 2000 and subprime in 2008? What kind of "carnage" do you see going on this time?
3) Whenever market goes down, most stocks go down. Some go down more than others. This created another great opportunity for successful investors. If you see better opportunities/quality in some other stocks than what you are holding right now, you can sell current profitable holdings and get into better stocks.
4) Don't forget that generally markets go up. If you have holding capacity and if you believe in what you are holding, try to not get carried away.
Enjoy investing.