SHOULD I SELL A STOCK WITH A DECLINE IN PRICE
Deciding whether to sell or hold a stock can be one of the most difficult and important aspects of investing in equity markets, as our emotions can work against our brain in multiple ways. We tend to focus on the stock’s most recent period of performance and subconsciously determine that to be the “new normal.” If stock prices have been declining, we expect the decline to continue and are tempted to sell. This is called the “recency bias.” We also tend to place greater value on immediate outcomes versus ones farther in the future. This “immediacy bias” can lead us to sell a stock to prevent modest short-term losses at the expense of positive long-term results. The desire to sell a stock (or stocks) to avoid short-term declines, and buy it back later at a lower price is known as timing the market.
One of the most common and damaging signals investors use to decide when to sell a stock is price decline. Declines in stock prices can happen for a number of reasons, many unrelated to the performance of the company itself. For example, a stock could decline significantly in sympathy with a competitor after a competitor’s disappointing earnings report. Additionally, stock prices may decline due to short-term challenges to the company’s outlook that can be smoothly managed through.
LARGE DECLINES IN STOCK PRICES OFTEN PRECEDE LARGE GAINS
In equity markets, large declines often directly precede large gains – and missing out on these gains can be detrimental to the long-term performance of your portfolio. In fact, if you were invested in the S&P 500 since 1995, missing just the 5 best days of performance would lower your return by almost 2% on an annualized basis.
If your focus is on long-term investments, it is important not to fall into these emotional pitfalls, and to stick to a simple and consistent investment philosophy. While prices may fluctuate, as long as the fundamentals of the company remain intact, it is usually best to be patient and stay the course. As Warren Buffet said, “The stock market is a device to transfer money from the impatient to the patient.” Occasionally, there may be an exception to the rule, and thus we recommend consulting with your wealth management advisor prior to making these decisions.
Author: Michael Gibb | President & CEO
Written: January 21, 2023