It's the moment no one prepares for: Your stock takes a dive, and you're losing hundreds or even thousands of dollars with each passing minute. Watching your investment fall can feel surreal, and you may be unsure of how to move forward. Here are a few things to keep in mind.
1. Don't panic
When the market dipped 460 points in October 2014, SigFig, an investment planning firm, tracked the long-term effects of investors' responses. Approximately 20% sold a portion of their mutual funds, ETFs, and equities, and a small margin, 0.6%, sold 90% or more. It was the latter group that had the worst performance over the next 12 month period: -19.3% compared to -3.7% of the overall sampling group. Panic selling is tempting when you're worried about the future, but it's likely to hurt you in the long-term. Check your emotions and don't make any decisions right away. Refer back to your original investment plans and remind yourself why you believed in the company in the first place. With that in mind...
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2. Do some digging
Share prices are influenced by a variety of factors: market fluctuations, analyst opinions, and business fundamentals to name a few. For instance, Shopify Inc.'s (SHOP +1.67%) share price fell 11.6% in early October after Citron Research founder Andrew Left characterized the platform as an overvalued "get-rich-quick" scheme that may be misrepresenting the number of merchants who use their software. Although his report was enough to convince some shareholders to sell, Left's critique was met with opposition by his peers, and in mid-November, Shopify announced a partnership with UPS Inc. (NYSE: UPS), a move that convinced others to remain invested.
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The stock market isn't an exact science, and when your investment falls, it's imperative to keep an eye on the latest news to learn more about the downward swing. Check out the Fool's community boards to read other investors' thoughts on the recent shift. Whether you cut your losses or weather the storm, current information can drastically influence the decisions you make. Look beyond the share price for detailed answers.
3. Don't forget to diversify
"Diversification is a protection against ignorance," according to Warren Buffet. If you're fretting over a single stock, it's a good idea to consider rebalancing your portfolio. For example, suppose that 60% of your assets are invested in your employee stock purchase plan (ESPP). If your company tanks, your job and long-term financial security are at risk. Diversity allows you to minimize losses that come with the ebb and flow of the market. For example, suppose your portfolio is currently split equally between four stocks. If one stock falls by 60%, your portfolio takes a 15% hit. Now, if your portfolio is split between 10 stocks, the same 60% drop in a single stock would only impact 6% of your total assets.
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Determining your ideal asset allocation comes down to your risk tolerance; in other words, how much volatility you are willing to deal with for greater earnings. Equities (stocks) are typically the riskiest investments depending on their asset classes, and fixed income funds provide more security with fewer gains. Take this quiz to learn more about your investing style and how to allocate your investments.
Sometimes a falling stock is a blip, and sometimes it's best to jump ship. Grasp the difference by making calm decisions, and don't lost sight of your goals.