What Should You Do if Your Stock Falls?
The stock quotes come in for the morning, and you realize you're already $200 down before the market even opens. How do you react and what should the game plan be when your stocks start to drop?
Do Not Panic
Although it is easier said than done, an investor must be careful not to panic, even as the stock quotes drop by the minute. When emotions play a role in your investment strategy, you'll soon find yourself risking more money to make back previous losses. While this would work out if your stock soon rises, you'll be out even more if it continues to tank. Eliminating your risks by limiting the effects of emotion on your trading will make you a more profitable trader. Consistency is key when playing the stock market.
Plan Ahead to Cut Losses
The generally accepted rule of thumb is to sell your stock after it drops more than 8% from your buy point. Some prefer 7% while others 9%, but the most important part to any plan is that you have one at all. By planning ahead to cut your stock losses by 8%, you'll be ahead of the game. A solid exit strategy will save you over the long run and help you avoid the risks associated with buying at the top and holding to the bottom. Many traders lose their accounts because they're unwilling to sell a position; an 8% loss is still modest enough not to wipe out your account balance, but you'll still feel the losing pinch.
For the Long Term
Stock prices move sporadically up and down with seemingly no sense of direction or urgency. When thinking long term investing, many people prefer to dollar cost average their investments over time. Simply, investors choose to invest a certain amount per month and buy as many shares as they can with their money. If you had chosen to invest $300 per month, you'd be able to buy 10 shares at $30 and 20 shares with a stock price of $15. With dollar cost averaging, you're buying fewer shares at the height of the stock price and loads of shares at the very bottom. The idea is that when the market moves in your direction, you'll have stock holdings that were purchased as inevitably a lower price than current market prices. However, there is a word of caution: dollar cost averaging only works with stocks in good financial shape and have the staying power for decades. Dollar cost averaging a falling stock will only get you into trouble, but dollar cost averaging a growth stock will do you well in the long run.
Stock Markets Inherently Rise and Fall
Realize that without the volatility in the stock market, it would be impossible to make any money. Though no one likes to see a huge hit to their wealth, especially in retirement funds or college savings plans, investors have churned out huge profits over the long run. Forget the day to day and focus on the end result; perhaps today's lows will allow you to buy more stock at a price that is right.