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What Should You Do If Your Stocks Decline Sharply After You’ve Bought?

The start of 2015 to today has been rough for investors in banking and energy stocks in Singapore’s stock market.

In the case of banking, blue chip banks such as DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11) have seen their stock prices fall by up to 24% since 1 January 2015.

In the energy space, a big energy and real estate conglomerate such as Keppel Corporation Limited (SGX: BN4) is emblematic of the situation; Keppel Corp’s shares have seen their price decline by 37% over the same period.

The experience of these companies’ investors remind me of an important question that most investors would likely have asked at some point in time in their investing careers: What should I do now that my stocks have declined sharply after I’ve bought them?

There are really only three things that investors can do:

  1. Do nothing
  2. Sell their shares
  3. Buy more shares

Each has its pros and cons. Let’s consider both angles with each of the action.

Do nothing

There may be good reasons for investors to do nothing. The stock market is a volatile beast over the short-term, and this applies even to big long-term winners in the market. So, it could make sense to do nothing to ride out short-term volatility.

Yet, there are dangers to doing nothing, especially when we do nothing for the wrong reasons.

For example, some investors may suffer from psychological biases that lead them to hold on to losing stocks. Loss aversion – the psychological phenomenon whereby people feel the pain of loss more acutely than the pleasure from gains of an equal magnitude – leads to the disposition effect, which is the tendency for investors to sell winning stocks and hold onto losers.

Thus, it is important that investors ask themselves: Why do I keep this losing stock? Is the investment thesis still intact? .

Doing nothing could be costly in the long-term, if our capital’s stuck in companies with poor business prospects in the future.

Sell their shares

This option is psychologically tough to do (the disposition effect is just one reason why that’s so).

But, it may be a good option if the stock’s investment thesis no longer holds water.

The advantage of selling is that it frees up capital for us to redeploy in other ideas. The risk here is that the stock’s price may rise after we have sold or that we’re being negative on the stock’s future prospects because its lower stock price has biased our thinking.

Buy more shares

The last option is to simply buy more shares.

When would it make sense to buy more shares after a stock has declined? When the original investment thesis is still valid. By buying, it lowers our entry price for the stock, so that’s an advantage.

But, the drawback here could be concentration risks. If a large portion of our portfolio has already been committed to the stock, it may not be prudent – from a risk management point of view – to add to our holdings.

Foolish Conclusion

There is no simple solution to the problem of what to do when our shares decline after we’ve bought them. We have to see which plan of action best suits our circumstances and pick our own poison.

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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.