Wednesday, May 12, 2010

When your stocks drop

In the last week the Dow (DJIA) has dropped 1,000 points and recovered every one. And many stocks have done the same. Those who panicked and sold locked in their losses. But loss is a relative term. My net gain was cut in half in about 3 days. I didn't sell anything, I bought a few stocks. I've since recovered most of what I lost in total, although some of my holdings haven't come back yet. I was still up good amount, but not as much as I was 2 weeks ago. My loss was on paper, meaning it's not a true loss, and my current gain is not a true gain, until I sell the stocks that are responsible for it, thus locking in a transaction price and the gain or loss. This is one reason why investing on your own is so hard. It is very tempting, when your holdings take a price beat down, to think the sky is falling and try to stop the loss. But in my experience, what goes down usually comes back up, especially if it goes down for no specific reason. The question is how long will it take. In the instance of what we saw last week, I figured it was something non-normal (they were blaming the Greek financial markets) so I figured all the stocks would go back to their previous levels within a few days or weeks. This is or was not guaranteed. Stocks could have kept falling. If they had, before I made any decisions I would have asked the simple question "why?" If there was no quick answer, maybe I hold on and ride it out. During the banking mess of '08 and '09 a lot of people got caught holding the bag when stocks dropped. Many of them sold. In hindsight, the smart ones bought more. Remember, it is a risk. The number one rule of investing is to be able to sleep at night.

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