What to Do When Your Stock Is Crashing

Steve's note: The key to thriving as an investor is avoiding big mistakes. One of the most common times to mess up is when things get tough – when the pressure's on. But you can take a couple of steps to make the right decision when a stock you own is falling.

The essay below – which I first shared in 2014 – tells you exactly what to do...


Right now, one of my stocks is crashing...

What should I do?

What do you do in that situation? You know you will face this situation sometime with one of your stocks, if you haven't faced it already.

Do you hold on and hope it comes back? That doesn't sound like a serious strategy.

Do you panic and bail out? That doesn't sound like a real strategy, either...

So... what should you do?

Having a stock crash on you is part of investing in stocks... It's a risk you take every day that you're invested in the market.

Here's what you need to do...

When a stock you own is crashing, you need to ask yourself two things:

  1. Is the reason I bought it still valid?

If you bought a tiny biotech stock because you thought its drug was going to succeed, but it failed, you need to get out... Don't say, "Well, the company has other things cooking, too" or "Well, I've lost SO MUCH already, how much worse can it get?"

Don't catch yourself saying either of those things. If the reason you bought the stock is no longer valid, get out.

  1. What is my "point of maximum pain"?

How much are you willing to lose before crying "uncle"?

You should try to define this point when you enter the trade. That way, you've made a rational decision to sell in advance, not an emotional decision right at the moment the stock is down.

The stock I'm down on is the VanEck Vectors Russia Fund (RSX). I'm looking at it through the lens of these two questions...

The basic reason I bought is, Russian stocks are "stupid cheap." So if things go from "bad to less bad" in Russia, you can make A LOT of money.

Russian stocks are still cheap. But what about No. 2 above – what is my point of maximum pain here?

In my True Wealth newsletter, I set a "trailing stop" of 25% on this trade. That is my point of maximum pain.

If my Russia fund closes below $21.99, we will sell the next day – no "ifs," "ands," or "buts."

RSX is trading around $23 – as I write this in March 2014 – so it's getting close to its trailing stop. I will sell if that happens.

The important thing here is, I have a plan. I'm not holding and hoping. I'm not panicking and selling.

I have an exit strategy.

What do you do when your stock is crashing? Do you:

  • Hold and hope?
  • Panic and sell?
  • Have an exit strategy?

Which sounds the smartest to you?

Make sure you have an exit strategy in place... Someday, you will be glad you do – guaranteed.

Good investing,

Steve

Editor's note: After a long and difficult year, tomorrow is New Year's Day. The markets and our offices will be closed... So look for the next issue of DailyWealth on Monday, after the Weekend Edition. We hope you enjoy the holiday!

Further Reading

"When it comes to your investments, why are you making them at all?" Corey McLaughlin asks. If you've never really considered this question, you might not know exactly what you're getting from your portfolio... Read more here.

"Instead of relying on predictions, you can be ready for anything in the markets," Dan Ferris writes. The market is unpredictable at the best of times. But if you know what you're buying and why, you'll be ready for anything... Read Dan's five strategies for being prepared right here: Five Ways to Prepare for Any Market Environment.

Market Notes
ONE SIGN THAT THE ECONOMIC RECOVERY IS TAKING SHAPE

Today’s company is giving us a reason to be optimistic…

Regular readers know that consumer spending is a good indicator of economic strength. It accounts for nearly 70% of the U.S. economy. So when we see more folks spending freely, it typically means the economy is doing well, or – in the time of COVID-19 – rebounding. One way we can track this is through financial stocks…

Discover Financial Services (DFS) is a leading digital bank and payments-processing company. Along with credit and debit cards, Discover offers customers checking and savings accounts, loan services, and more. While COVID-19 has hurt consumer confidence this year, Discover’s latest quarterly report shows that people are still spending money… The company’s payment-services volume is up 11% year over year to $69.7 billion. Plus, sales have improved since last quarter across all categories, including gas, restaurants, and travel.

As you can see, shares of DFS recently hit a fresh 52-week high. They are up more than 250% from their March bottom. As long as the economy continues to recover, this stock should remain in an uptrend…