4

If you buy some stocks and the market prices plummet, does it make any sense to hold the stocks just to see if it goes up again, so you don't lose money?

The only advantage I can think of is avoiding entry/exchange/broker fees. However, some people around me seem to see something wrong with this strategy.

Would it make sense with other types of assets like real estate, gold, collectibles, or whatever?

  • 3
    If your objective is for your stocks to never lose money then you should either avoid investing or marry Buy & Hope. Plan B is to invest and learn about risk management. – Bob Baerker Jun 24 '18 at 17:31
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    Many people believe that they don't lose money as long as they don't sell. Clearly, economics and finance should be taught at school. – DonQuiKong Jun 24 '18 at 19:58
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    @DonQuiKong: There is some truth to it. Stocks that drop are more likely to rise than stocks that don't. I've been tracking my portfolio for a long time. Most drops are for bad reasons and will be corrected. – Joshua Jun 24 '18 at 21:52
  • @Joshua - most drops that are due to bad reason will either not be corrected or will take a very very long time to recover, usually after a major restructure. It is usually the drops for not much reason at all that usually bounce back (but not all the time). – Victor Jun 24 '18 at 22:17
  • @Victor: Gah. Bad had two meanings. Bad reason ~= reason unrelated to company's profit or longevity. – Joshua Jun 24 '18 at 22:25
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If the reasons you bought the stock are still valid then it's a bargain, and the low price gives you an opportunity to buy more. If the drop in price means that your initial analysis was wrong then you have to re-analyze the stock. If you'd still buy it at the current price, keep it. If buying it was a mistake, sell it.

  • No stock is a bargain because you don't really know it's true worth, and what you think might be a bargain price today might be expensive tomorrow .If your initial analysis was wrong what makes you think any further analysis will change that. If you are into buying falling stocks then yes lose more money and keep it or buy more are lose even more. – Victor Jun 25 '18 at 3:47
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    @Victor It's still a bargain, because if you think it's worth 5$, and its price is 3$, even if your analysis is off, you either save money or have more of the stock than if you bought it at a higher price. So, even if you make a mistake buying it at that price, the mistake is going to be cheaper than it would be if the stock were more expensive. – sgf Jun 25 '18 at 7:29
  • What you think it's worth does not matter to the market. So what happens if you think it is worth $5, you buy for $3 and soon after the price goes down to $1. It's not a bargain anymore is it, more like quite expensive. And if your response is to throw more good money after bad money then you might as well donate your money to a worthy charity. – Victor Jun 25 '18 at 9:37
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    @Victor what you say is true. But if you don't trust your own judgement then you shouldn't be trading stocks. – Tom.Bowen89 Jun 25 '18 at 10:56
  • @Tom.Bowen89 - let me add that what it is worth does not matter to me either. All I need to make my decisions it the price action, that is what the price has done in the recent past and what it is doing now. I don't try to predict anything, I listen to the market and I act on that. If my decisions are wrong I use risk management and get out, if I am right I aim to make at twice on the trades I take a loss. If I have a 50% success rate I make lots of money. Also I don't trade with my emotions by making all my decisions after market close. – Victor Jun 25 '18 at 11:35
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Ignoring tax treatment, there absolutely is no difference between buying the stock in the past and the price falling and buying the stock in today's price. In both cases you have the same amount of stock worth the same price.

Assuming otherwise is called the sunk cost fallacy

Keep the stock if you would buy it today at today's price.

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    There is a difference, it is called market sentiment. – Victor Jun 24 '18 at 22:19
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    @Victor what... – not_a_comcast_employee Jun 25 '18 at 5:03
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    What, you don't know what market sentiment is? – Victor Jun 25 '18 at 5:30
  • Given that market sentiment is fickle like the stock prices themselves, that's no additional argument for or against selling. – MSalters Jun 25 '18 at 14:45
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    @Victor If you're a contrarian, you often assume market sentiment is wrong. In many cases, market sentiment is simply just people jumping on a bandwagon rather than analyzing carefully. – Barmar Jun 25 '18 at 16:24
2

If you would've bought it in its current state, then keep it.

If you absolutely wouldn't have bought it in its current state, then sell it.

For anything in between, use your best judgement to determine how the stock will behave going forward.

Of course you should also take into account any applicable fees. Fees might make keeping it a more attractive option, but you shouldn't let it sway you too much in that direction - any significant drop in the stock price should make negligible the fee you would've paid to sell it earlier.


The future value of a stock is (generally) not dependent on whether or not you bought some of that stock, so the fact that you bought some shouldn't really affect your analysis of that stock and whether you think it's a good or bad investment.

You've already lost the money.

Your subconscious may argue that you hang on to it as to not accept the loss, but that's not sound reasoning - the loss already happened, the past is behind us and nothing will bring that money back. Yes, maybe the stock will climb again (or maybe it won't), but that's independent of the money you've already lost - you could get a similar gain by taking the money out and putting it somewhere else (minus any fees).

Myth: What goes down must come up

The price of a stock could very well just keep falling, or remain fairly stable. There's no rule that says the price of any given stock must recover. It's generally expected that the stock market as a whole will recover, but that doesn't necessarily hold for any given stock.

If you decide to sell, there's of course a chance the price skyrockets right afterwards, and that won't feel great, but then neither will hanging on to a bad stock for way too long.


The fact that you have this question might indicate that you need to do some reading up on finance and stock trading before you start (or continue) trading individual stocks with real money. Stock trading is hard - there are plenty of things you need to know to be good at it (even if some people who know very little get lucky). Reading up on finance could also help you manage your money better in general.

0

It is commonly accepted that one cannot beat the index by significant margin. Basically this means that whatever stocks at whatever point of time you choose to buy, you won't reliably get better results than the average index of the market. Of course your results will vary, the more stocks you invest in the closer to average it will be.

Now: can you lose to the index? As far as I know, only by losing your money into brokerage fees or by investing in particularly non-liquid stocks, for example if some company is going bankrupt and no-one else would be buying that stock anymore.

Thus, even though it does sound smart to think out strategies and try to estimate the target prices for each stock, it does not seem to be that important for the end result. Just have enough diverse portfolio that you don't lose all your money in one failure. If you stop investing after one failure, there is no time for things to average out.

After all, whenever there is a lot of people selling and buying, the stock's price matches the markets average prediction of the stock's future performance. Sometimes your personal prediction will be more accurate, and sometimes less accurate, but on average owning any diverse set of stocks will be approximately equal to owning the index.

  • "whenever there is a lot of people selling and buying, the stock's price matches the markets average prediction of the stock's future performance." What does that mean? The stock's price does not match any prediction of the stock's future price - The stock price is determined by supply and demand in the market and has nothing to do with guesstimates of valuations. – Victor Jun 25 '18 at 3:41
  • @Victor If your guesstimate for the stock is higher than the current market price, wouldn't you buy, thus causing the price to rise? – jpa Jun 25 '18 at 5:00
  • I don't go by valuations because I know they are useless, I only buy if it is currently up trending. I am sure one person's decision to buy will not cause the price to start rising. – Victor Jun 25 '18 at 5:28
  • Of course you can perform worse than the index by investing into individual stocks. Say you compare your performance to the DJIA (which IIRC is made up of 30 companies), and are investing in US stock. If you buy stock in one of those companies picked at random, there is a pretty high probability that you'll end up buying stock in a company that will do worse than the index; or, just as likely, one that will do better. If you buy an equal distribution as in the DJIA in all 30, chances are pretty good that corrected for fees, your portfolio will match the index you're tracking. – a CVn Jun 25 '18 at 12:47
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    With a few exceptions, it's just as difficult to pick losing stocks as it is to pick winning stocks. If that wasn't the case then people would just pick stocks that were going to lose and short them and make money that way. – Itsme2003 Jun 26 '18 at 23:25
0

If you don't know WHY it's down then you are taking a blind decision.

But let's say that the chances of success are 50%. However, you are competing against other. If the others (such as brokers) have information (and they have), then your chances are less than 50%, ergo, you most likely lose money.

  • The reason it's down does not even matter, because if you think you know more than the market you have problems. Also what has the chances of success and competing with brokers got anything to do on whether to keep or sell the stock? – Victor Jun 25 '18 at 3:24
  • There is only every one reason WHY a stock is down: there are more buyers than sellers. 99.9% of the garbage written by "market experts" is just that, garbage, to invent a reason for the price move after it happened. – alephzero Jun 25 '18 at 10:13
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    @alephzero - so you think more buyers than sellers sends a stock's price down? Isn't it the other way around!!! – Victor Jun 25 '18 at 11:38
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When you wait for a stock to recover, you are missing out on other opportunities. The mere fact that it went down doesn't mean it will recover any time soon -- if ever. In actuality, the decision to keep the stock is the same as if you were deciding to buy it for the first time today.

While I can't give you a surefire formula for making money, I can give you one for losing it -- check stock prices every day: if you see a stock is going up, buy it. If a stock you own is going down, sell it right away (or use a stop-loss order to do that for you).

The reality is that if a stock is going up, it will probably start going down again soon -- unless you got in on it BEFORE it's rise, you won't gain anything as the money is already made (perhaps by the guy who sold it to you). This is why many people complain that any stock they buy goes down. And if you're quick to sell a stock that's going down, you will probably sell at the bottom of the market.

When people react as above, that only increases it's volatility, leading to bigger price swings than the fundamentals would suggest.

I once worked for a company that IPO'ed. I bought some stock, then it went down. The "reason" was the dot-com crash, but my company wasn't really a dot-com, so I figured the loss in value was bogus. So instead of selling off, I bought some more. Then the price recovered, and then I sold it. Then the price went way down, I bought a ******** of it, it went back up again, and I sold it. I was able to early-retire then, as I was rich. (A good part of this was luck, of course. But the point is that what most people do is "buy high, sell low", which is the opposite of what they should be doing.)

  • I seem to remember this example being given in 'Investing for Dummies'. It said something like "if you bought IBM at time X, you'd have to wait 12 years for it to recover back to that level". Of course, at the time you wouldn't know if it was going to be a week, a month, a year, 12 years or 50 years. If you can wait an indefinite time, then go for it - if not, take the loss and use whatever's left to trade some more and hopefully make more money than you would have done with the (now) loss-making stock. – Ralph Bolton Jun 25 '18 at 9:29
  • Sounds like you and most people don't understand how a trend works. For example, an uptrend does not go up in a straight line, it will go up to a peak and then down to a trough, then back up to a higher peak that the last peak then down to a new trough which is not as low as the previous trough. So each successive combination of peak and trough is higher than the previous. So you buy when the price starts going up in these peaks and troughs not when the price is still falling. Learn about market sentiment and why the market moves up in these peaks and troughs if you want to really make money. – Victor Jun 25 '18 at 9:48
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Before you buy any stock you should already have your get out strategy worked, at what point will you get out. This is called your risk management.

Most brokers will allow you to place a stop loss order when you first place your buy order. You need to work out at what point will you take a loss, 5%, 10%, 15%, 20%. Basically if your looking to be in the stock for the medium to long term (months to years) you should choose a wider stop of 15% or 20%, allowing you to capture most of the upward movement in the trend, and only taking you out if the price really starts to dive. If the price continues to move up you can either manually move the stop loss upwards or you can set a trailing stop loss so it is always trailing the highest price reached by the percentage of your trailing stop.

No matter how amount of fundamental analysis you do to try to convince yourself that you made the right decision to buy and it is a good stock and it will turn around soon and come back up, the market doesn't care, the market will do what it wants, so listen to it, and if it's time to get out - get out.

protected by Ganesh Sittampalam Jun 25 '18 at 7:17

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