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2 Questions You Need To Ask Before Selling Your Stocks During A Market Decline

It’s ugly out there in the stock market. The Straits Times Index (SGX: ^STI) is down by nearly 30% from its April 2015 high. Major blue chips such as SembCorp Marine Ltd (SGX: S51) and Keppel Corporation Limited (SGX: BN4) have fallen even harder by 55% and 50%, respectivey, over the same period.

There are even analysts from banks sending out warnings to investors to “sell everything” because 2016 will be a “fairly cataclysmic year.”

Given these developments, it’s understandable if you have the following thought: Should I sell now? But before any sale’s made, there are a few questions you probably should ask yourself first.

1. Ask if the business conditions of the stocks you’re invested in has changed to warrant a sell decision.

If the business conditions of a stock has worsened dramatically due to some major events, a reassessment of the stock’s investment thesis is warrented. If the original thesis is no longer valid, then selling may be the right thing to do.

The plunge in oil prices recently is an example of a major event that could have big repercussions for many businesses. SembCorp Marine is one firm that has seen its business being affected – in fact, one of its major customers is even facing the risk of bankruptcy because of the low price of oil. These are developments that may have soured an investor’s original thesis for investing in Sembcorp Marine.

At the same time though, it’s worth noting that there may be many companies in the current climate that have falling stock prices yet have business conditions that are still intact or even improving. In this case, selling such stocks because the market has fallen may not make sense.

2. Ask if you can emotionally handle a major stock market decline in the future after experiencing one at the moment.

As the great Warren Buffet once said, “Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament. Otherwise, something will snap you.” You can take this opportunity to assess your own personal temperament and decide whether stock market investing is the right thing for you.

There’s no shame at all in realising that stock market investing is not for you. After all, every individual’s psychological makeup is different. If your conclusion is that you might lose sleep unduly when stocks decline, then some steps you could consider would be to 1) stop investing all together, or 2) reduce your asset allocation in stocks. If this really is the case, then it may make sense to sell too.

Foolish Conclusion        

The legendary investor Benjamin Graham once wrote that The investor’s chief problem – and even his worst enemy – is likely to be himself.” We can sabotage our own investment portfolios through bad investing behaviour, of which selling stocks when they’ve fallen can be one. That said, there may still be good reasons why a sale makes sense too, as I’ve explored above.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.