Here’s What You Can Do If Your Favorite Stock Plunges – The Motley Fool | Omd Cialis

Investors have different risk tolerances, time horizons and industry preferences. But chances are, you have a specific stock or two that you’ve owned for a while or plan to own for a while.

But with much of the market posting double-digit declines in 2022, what should you do when a company you thought was a custodian dips into the red? Here are strategies you can employ when a top stock or one you were particularly fond of is suffering big losses.

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Reconsider why you bought the company in the first place

The stock market has historically been an excellent engine for wealth creation over time. It’s a global market with a large pool of buyers and sellers, making prices known and giving stocks an element of liquidity unmatched by hard assets like real estate. However, this liquidity can be tempting to buy or sell when volatility rises.

When a stock plummets, it’s important to remember why you invested in the company in the first place. As Amazon (AMZN -0.91%) The stock fell from its split-adjusted price of $188 per share at its peak to a 52-week low just above $100, with many investors panicking and running to exit in that short period of time. Amazon Web Services (AWS) growth is likely to slow after phenomenal 2020 and 2021, and Amazon struggled to turn a profit from its domestic e-commerce business as labor and fuel costs fell on the bottom line.

However, it’s unlikely that a long-term investor in Amazon bought the stock simply because they hoped its 2022 results would outperform year-over-year. A more likely investment thesis would revolve around a bet on AWS’s high-margin growth as the cloud industry continues to grow and become an integral part of modern businesses. It could also be a bet on e-commerce and streaming via Prime Video and Twitch.

By rethinking why you bought a stock in the first place, it’s much easier to resist the temptation to sell it when it falls big on a single earnings call. With Amazon stock plummeting over 10% last Friday in response to a solid second-quarter earnings report, it’s easy to say with hindsight that the stock was a buy. But right now, the situation is far less certain and will require a lot of discipline and patience to weather volatility.

Determine if the sale is valid

Sharp sell-offs and sharp rises can be confusing for new investors, who may wonder if a company like Amazon is really worth hundreds of billions of dollars less today than it was a year ago. At times like this I like to think of a lesson from Morgan Housel’s book, The psychology of Money. The lesson is to know what game you are playing. The stock market is a playing field in which several different games are played by several different types of investors. If you’re a short-term trader who cares more about quarterly earnings than a five-year strategic plan, a company lacking guidance is a big deal. However, the more effective strategy is to find companies that can be successful over the long term and let those companies build wealth over time.

With that in mind, a stock price might deserve to fall, while the drivers behind this selloff have little to nothing to do with why you own the stock in the first place. For example, Procter & Gamble (PG -0.67%) The stock fell as much as 7% on July 29 on lost profits and rising costs. However, the company’s cash flows, market position, and product mix make it more than capable of paying and growing its dividends and share buybacks over the long term. P&G is a classic example of a stock that probably deserved to fall because its quarterly results fell short of expectations. But the drop in the stock price may be largely meaningless to shareholders who have turned to the stock as a decades-long passive income stream or to supplement income in retirement.

Think about what might come next and how you would react to it

Another good strategy to implement when a stock you like is going down is planning what to do next. If it keeps falling, will you buy more? If not, what would it take to make you buy more? If the company’s troubles continue in the coming quarters, how would that affect the long-term investment thesis? Are the issues putting pressure on the stock likely short-term headwinds or symptoms of a larger problem?

By asking these questions early, an investor has a better chance of making a calculated decision in the face of high volatility, rather than being the victim of impulsive reactions.

Zoom out and focus on what matters

Bear markets can be intense and stressful for even the most experienced investors. But investing is all about finding companies that meet your specific goals, be it growth, revenue generation, value for money, etc. By going back to the fundamentals, you can give yourself the preparation you need and that give you the confidence you need to make the best decisions for your portfolio and your financial health.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber does not hold any of the shares mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

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