March saw the sharpest stock market decline in history.
But in April and May, investors experienced a bit of a recovery from the market’s lows.
And now, in just the first three days of June, we are witnessing a stunning rally that has taken the Straits Times Index (SGX: STI^), or STI, up 20% from its low on 23 March.
Investors cannot be blamed for feeling confused.
After all, Singapore’s economy is facing its worst recession since independence, with GDP forecast to hit a range between -4% to -7%.
Numerous jobs have been lost, while many businesses have gone belly up.
Yet, the stock market has somehow defied expectations by rising.
If your stock has tracked the STI’s rise over this period, you are now faced with a happy problem.
Is it time to take some profit off the table, hold on to your shares or do you buy into more of the rally?
Too many trades spoil the broth
It’s tempting to pocket some profit after seeing the rise in share prices, and then try to buy the same shares back again when there is a pullback.
You may also get the impression that trading in and out of the rally can earn you a good amount of profit to help you tide over this pandemic.
However, the truth is that too many trades end up racking up significant amounts of commission, acting like sandpaper, slowly eroding your returns and magnifying your losses.
To use an analogy, imagine if you wanted to cook a dish but you had to leave the pot alone to simmer for a long period.
If you could not resist peering into the pot repeatedly just to check on whether the dish is turning out fine, you will end up ruining the food.
To relate the above example to investing, numerous trades end up destroying your portfolio as you will be enriching your broker who collects commissions from each trade, rather than yourself.
Psychological resistance to buying higher
Selling may also lead to regret as share prices head higher.
Investors who possess a “fear of missing out” mentality may then desire to jump back in again.
However, when faced with the prospect of buying at a higher price than what we paid for, as humans, we tend to shy away.
This behaviour has prevented many investors from buying back shares that they have sold off too early, thus missing out on a rally that may extend into months or even years.
What we do suggest is for you to hold on to your shares if the business continues to perform well.
If the reason for purchasing the shares in the first place is still valid, then there is no reason to sell them just to earn a quick buck.
Focus on the business prospects
A third option would be to accumulate more shares even as prices head higher.
While this may seem counter-intuitive, you need to ask yourself a very basic question — am I buying part of the business, or simply buying because the share price has risen?
If you wish to own more of a great business over the long-term, then a 20% rise in the share price should not act as a deterrent.
The focus should be on the business prospects of the companies you’re invested in.
If these prospects are still intact, and the company has a long runway for growth, buying more of it is always a wise move.
Get Smart: Have faith in the quality of the business
So, the answer to the burning question should be — it depends.
If the business you own is facing insurmountable problems due to COVID-19, you may wish to consider selling it and switching to a stronger and more stable business.
The rally will make such a decision easier to swallow, even if it means stomaching some losses.
But, if you already own a great business with superior characteristics, you should continue to hold it to realise the full benefit of its future growth.
Buying more of such businesses using cash you can afford is also a wise move.
In short, analyse this happy problem from a business perspective, rather than purely a share-price perspective.
You will then be able to make a decision that you will not end up regretting years later.
Want to know what stocks we like for our portfolio? See for yourself now. Simply CLICK HERE to scoop up a FREE copy of our special report. As a bonus, we also highlight 6 blue chips stocks trading at a 10-year low. But you will want to hurry – this free report is available for a brief time only.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
The post Your Stock Has Risen 20%. Should You Buy More, Hold or Sell? appeared first on The Smart Investor.