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Your Stocks Are Down 50%: Here’s What You Should Do Next

Face Palm Man in Suit and Tie
Face Palm Man in Suit and Tie

Risk control should be at the heart of every investment decision.

But despite our best efforts, some investments may not turn out the way we expect.

A host of factors such as competition, macroeconomic conditions, industry changes, and even management decisions play a role in determining how an investment fares.

It’s natural to end up with a portfolio where you have a mixture of winners and losers.

Among the losers, some positions may even be down 50% or more, as evidenced by the recent crash in high-growth stocks due to a combination of inflation and surging interest rates.

The question you may ask is – what should you do with investments that have lost half their value?

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Is it better to adopt a wait-and-see approach, sell the position to free up the cash, or buy more?

Sizing your positions

A word of advice may do you good at this point.

Before purchasing any investment, you should think about how to size the position within your portfolio.

If you are buying a blue-chip company with a long and stellar track record of going through thick and thin, you can afford to put more money in the position.

But if you intend to buy a speculative growth stock that is not generating any profits or free cash flow, then the position should be sized smaller based on the company’s higher risk profile.

By sizing your positions based on the perceived risks of each business, your portfolio will not be badly impacted should the riskier positions witness a sharp plunge in share price.

When fundamentals deteriorate

A good place to begin in deciding what to do with a losing position is to assess the business behind the stock.

Take a good, hard look at its prospects and what has transpired to cause the share price to shrivel.

If the fundamentals of the business have deteriorated, then it may be a good idea to head for the exits.

To determine this, you need to look at two key aspects – the valuation of the business (when you bought it) and the trajectory of the business moving ahead.

Purchasing a stock at a high valuation when projections were rosy is a recipe for disaster as the share price will plunge when reality bites.

This happened with Grab Holdings (NASDAQ: GRAB), a pan-Asian ride-hailing and food delivery giant.

Listed through a merger with a SPAC (Special Purpose Acquisition Company), the company traded initially at US$13 before plunging to close 20% lower by the end of the day to US$8.75.

Shares are currently hovered around US$3, down nearly 66% from their first-day close.

For a deterioration in fundamentals, a good example will be used-car retailer Carvana (NYSE: CVNA).

The company’s shares touched an all-time high of US$361 but now trade at just US$7.87 for a massive 97.8% plunge.

The company has been a pandemic darling as shoppers shifted to online purchases of cars rather than visiting a dealership.

Carvana then borrowed too much money and splashed out US$2.2 billion on an ill-timed acquisition.

The previously high-flying company is now teetering on the brink of bankruptcy.

A temporary blip

There could be another reason for share prices to halve, one that is based more on sentiment rather than fundamentals.

In such cases, the fall in share price represents a temporary blip as the company works to resolve its issues.

Once these are settled, the business can continue to grow again, albeit using a different trajectory from its original.

One recent example is Netflix (NASDAQ: NFLX).

The company was trading at US$381 a year ago but plunged more than 57% to a 52-week low of US$162.71.

Netflix had seen two consecutive quarter on quarter declines in subscriber numbers for its first and second quarters of 2022.

For 2022’s fourth quarter, however, the streaming TV company blew past expectations by logging a 7.6 million increase in subscribers.

The decline turned out to be temporary as Netflix saw its subscriber count head to nearly 231 million by the end of 2022.

Its share price has also subsequently risen to US$332 now.

Get Smart: Assess on a case-by-case basis

The decision on whether to buy more or to sell boils down to whether the business has been damaged irreparably, or is just going through temporary difficulties.

Of course, the devil is always in the details and it is necessary to dig deeper into each business to understand its problems and prospects.

Doing so, however, is necessary if you wish to make a decision that you will not regret later.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

The post <strong>Your Stocks Are Down 50%: Here’s What You Should Do Next</strong> appeared first on The Smart Investor.