Loss versus averaging down.30 Dec 2023 12:10
Different folks will have different ideas and strategies about this, so this is just a food-for-thought type post.
Its impossible to rely on a stop loss in most shares but particularly in this type of "bad news = SP slump".
So (and I am really genuinely surprised by many here seem to have done this), the investor should never over commit funds and it has other benefits to mitigating the percentage capital loss from the portfolio should bad news arrive.
Because less money is involved it is mentally MUCH easier to decide the next course of action. It allows rationality to be used without the anguish of the loss to potentially cloud judgment.
When bad news hits I always sell immediately the market opens. For two reasons. Mainly the news has changed and the criteria for buying the stock in the first place no longer exists. The second one is if its really bad, as it sinks in the SP will probably fall further during the day, and as it does the pain for holders increases and they often sell keeping that SP fall pressure up.. (Sometimes that opening-bell fall can be an over reaction and indeed there is sometimes a small rally but then usually it falls again and there is no rally thereafter, so even when I could have held on a bit and maybe got a better price, almost always during the day the SP will finish below my sale price.)
So now I am out of the stock, lovely, took a larger percentage hit but on a relatively small amount of cash.
If I decide to come back in (and I did this at .25p), its a new trade. The last loss-making trade has been and gone. It's history and has no mental bearing on the criteria and plan that I have worked out in my head prior to buying that is in place on this new trade.
However painful liquidating a loss can seem, it is (or tends to be), quite liberating. Its done, the weight is removed off your shoulders. You move on mentally, you learn, you decide you don't want that pain again, you can look at different stocks with fresh eyes, etc etc.
So that's the case for selling and taking a hit.
Averaging down is in principle, fine. If you believe the market has over reacted, or that in fact the story hasn't changed, and the market has mis-interpreted the "news" then it can be an opportunity to increase your stock holding at a lower price, allowing for greater profits when you decide to sell.
The trouble is 2-fold, one you did not expect this bad news, so the story has changed, so probably the reason you bought in the first place don't apply now.
And by adding you are probably over committing funds to one stock that is now at a higher risk level of when you first bought, (breaking 2 rules.)
Never think you have no choice. you always have at least 2.
Like every game, to be successful at it, and this one in particular, is played in the head.
IMO dyor etc.
Sign In
Follow the stocks
