Deciding how to invest your money may seem pretty straightforward… until the stock market tanks.
But the reality of investing is that the stock market regularly fluctuates. Even if you think you’re making the best picks possible, there’s a chance stocks will go down and you’ll wind up losing money at some point.
While you could sell off your stocks in the short term when this happens, you might lose out on a future recovery — which can result in a huge loss over the lifetime of your portfolio.
Erika Taught Me
- While you can’t time the market, it is cyclical, which means it’s likely to have periods where stocks are down.
- A downturn can help you purchase stocks at a lower price or capture returns come tax time.
- Rather than trying to time the market, mitigate risks and align trades with your long-term goals.
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What To Do When Stocks Are Down
As the saying goes: what goes up must come down. This includes stocks.
There are many reasons why stocks go down. There could be a change in the global economy, a new regulation suddenly implemented, or a company had a bad earnings call.
When this happens, you might consider selling off your stocks to minimize your losses — but that’s not always the best plan.
Here are a couple of things you can do when stocks are down.
Buy-and-hold
Buy-and-hold is a long-term investment strategy where you stick it out for the long haul.
It’s a more hands-off approach where you assume the stock will inevitably recover and bounce back — or even grow.
To figure out if it makes sense to buy and hold a particular stock, look at the conditions in the market and the business’s financials. These factors can signal what to do. Risk related to the global economy or a particular industry is different from the credit risk of an individual company.
Sometimes it can even be beneficial to buy new stocks when the market is down. Think of these stocks as being on sale. When the share price is low you can buy more shares.
This increases your purchasing power so that when the market rebounds, you’ll have more shares to capitalize on.
For example, when pandemic lockdowns went into effect in 2020, the hotel industry plummeted. But after lockdowns lifted, hospitality stocks bounced back, thanks in part to pent-up demand for vacations.
This is a good example of when it makes sense to buy a stock while it’s discounted and hold onto it while it appreciates in value.
One of the best ways to mitigate risks right upfront is to build a well-diversified core portfolio. You can do this with market or sector-specific exchange-traded-funds (ETFs). That way your portfolio is balanced and isn’t exposed to too much risk during a downturn.
Sell off
Depending on your goals, the state of the market, and a company’s business model, it might make sense to sell stocks that have gone down in value.
To figure out which stocks to sell off first, study each company’s financials. Identify the reason the stock declined and figure out if the losses will be sustained or only temporary.
A major accounting issue or an abrupt change in management could signal a company is on the decline. Even if there’s a market upturn, internal problems may mean the company won’t benefit from it.
This is another reason why investing in ETFs can help mitigate risk rather than individually picking stocks. If something happens within a company, your exposure is limited than if you own several of the shares outright.
Other times, you might decide to sell as part of your tax strategy. Tax-loss harvesting is something you can do to reduce your taxable income. You might decide to sell regardless of the share price because it can help you come tax season.
READ MORE: Active vs. Passive Investing: Which Is Best?
How To Decide Whether to Sell Your Stocks
Whether you decide to hold or sell your stocks is up to you. Here’s how you can approach the decision-making process.
Don’t panic
Investing is very emotional. If you’re constantly checking your portfolio and see a continual decline in value, you might panic.
But remember that the market tends to be cyclical, which means it’s bound to recover. Just look at the recovery from 2008. Someone who was on the cusp of losing everything during the financial crisis has recovered — and even seen their portfolio’s value increase.
Keep your long-term goals in mind and avoid panicking when the market goes down. Take steps to mitigate risk in your portfolio upfront by diversifying your asset allocation.
Analyze why the stock is down
When you’re able to objectively look at the situation, look for reasons why a stock is down.
It could be the result of macroeconomic conditions affecting the entire market or it could be an isolated incident within the company you’ve purchased shares in.
Figure out why the stock is down and if the reason for it merits selling your shares or holding onto them.
READ MORE: What To Look for When Buying Stocks
Re-evaluate your long-term goals
Depending on the reason why a stock is down, you might need to reassess your personal financial goals. The stock market is volatile and you may need to change your goals as a result.
Let’s say you’re heavily invested in growth stocks but, thanks to a recession, the market has gone down. If you’re a decade or two away from retirement, you might want to rebalance your portfolio to begin preserving capital.
This will require you to incorporate more conservative assets into your portfolio’s mix and could change your retirement timeline, especially if you invested in growth stocks as a way to catch up.
Understand what’s happening and change your goals and expectations as needed. Look for opportunities to mitigate risk in the meantime.
READ MORE: How To Set Your Investment Goals
Determine if there is a tax benefit
Look for the silver lining in a market downturn. While a stock’s value may have gone down and you may experience losses in your portfolio, it isn’t all doom and gloom.
There may be an opportunity for you to take advantage of tax-loss harvesting. That can help you lower your taxable income. When tax season rolls around, you could invest the savings, helping you come out ahead.
Keep in mind that tax strategies like this only work in a taxable investment account like a brokerage account. You won’t be able to find tax savings in tax-deferred accounts like your 401(k).
Keep track of your trades
If you’re not already doing so, start keeping track of your trades. This will help you identify patterns so you can plan around them in the future.
Understanding your trade history will also help you manage emotionally driven impulses to sell off during a downturn.
Keep track of the companies you’re invested in and why you’re invested in them, so if the stock goes down and you decide to sell off, you can learn from the experience.
FAQs
Can a stock go into the negative?
A stock can go down to zero but it won’t go negative.
Before a stock plummets, a company might file for bankruptcy and become delisted. Keep in mind that when that happens, common stockholders are paid last. Creditors and preferred stockholders will have priority if a company decides to sell off its assets.
The only way for a stock to go into the negative is if an investor engaged in a short sale or bought shares on margin. Because the investor didn’t own the share outright, they’ll be on the hook to repay whatever is owed to the brokerage firm if the share value takes a nosedive.
Do I have to pay if a stock goes down?
You do not have to pay if a stock goes down if you purchased the stock in cash. If you bought shares on margin, you could go into debt if a stock’s price goes down and doesn’t recover.
TL;DR
The stock market is always in flux, which means sometimes your investments will go up — and sometimes they will go down.
The important thing is to not panic or get too emotional. Take a rational eye to what is happening. Is there just a general dip in the market or is the company itself in trouble?
Once you know why your stocks have fallen, and whether it’s due to a market cycle that will likely rebound, or a company that’s no longer worth your time, then you’ll have a clearer idea of what to do.
For more investing insights, check out these episodes of the Erika Taught Me podcast:
- Money & Investing Pitfalls to Avoid
- Investing in the Stock Market Explained: A Guide for Beginners
- Why Getting Rich is Easy And Being Patient is So Hard
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Amanda Claypool is a writer, entrepreneur, and strategy consultant. She's lived in the Middle East, Washington, DC, and a 2014 Subaru Outback but now resides in Austin, TX. Amanda writes for popular sites including, Forbes Advisor, Erika.com, and The College Investor. She also writes about the future of work and the state of the economy on Medium.