Got the Market Sell-Off Blues? Do These 3 Things Right Now
It's normal for investors to feel a bit depressed after seeing their portfolio's value go down, like during the sell-off on Aug. 5. But there's a lot to be done about feeling better and being better positioned for the next time the market slides.
In particular, there's three things you can do right away to offset some of the sell-off blues.
Image source: Getty Images.
1. Pause
The first thing you should do if you're feeling distraught about the red numbers in your portfolio is to step back, pause, and commit to not doing anything hasty with your investments. Things are rarely as bad as they seem.
More importantly, impulsively selling your stocks during a sell-off or panic often means selling at a loss or cutting yourself off from the chance of a future gain. It's also just bad form.
Even if you aren't panicking, depression after experiencing financial losses is not to be trifled with. Close the browser window and take a walk. Decisions made immediately in the wake of a drawdown are more likely to be shortsighted than prescient.
2. Assess the situation clearly
The next thing to do is to get some perspective on what happened, which of your investments are actually impacted, and why. This will determine your strategy for taking action -- and calculated action is a strong defense against depression.
Let's assume you have a three-stock portfolio -- CRISPR Therapeutics (NASDAQ: CRSP), Amgen (NASDAQ: AMGN), and Abbott Laboratories (NYSE: ABT) -- and you go through the process of gaining situational awareness. Here's how their shares performed relative to the broader market during the sell-off:
SPY Total Return Level data by YCharts.
Looking at the price action alone, our hunch might be that whatever caused the market to dip is something that uniquely impacted CRISPR Therapeutics, as its shares are down the most by far out of the three. But that would be incorrect.
The company reported its second-quarter earnings on Aug. 5, the day of the dip. Based on some of the figures it provided on the number of new patients starting treatment with its gene therapy, onboarding may be proceeding a hair slower than anticipated. That likely caused investors to figure that it would take a bit longer to realize revenue, thereby negatively impacting the share price; the sell-off may have added to the damage.
In contrast, neither Amgen nor Abbott Labs had anything to report that day. Their price action is thus likely to be noise rather than a signal which requires your further attention. And by the looks of it, neither is exposed to significant issues as a result of the breakdown of the carry trade that drove the sell-off.
So for this three-stock portfolio, the catalyst for the sell-off didn't change anything about your investment thesis for any of the holdings. In fact, it might have created a brief opportunity to buy more shares at a discount.
That won't always be true when there's a drawdown. Sometimes external events do detract from your thesis, or cast doubt on a company's ability to grow in value over the long term. In those cases, it may be appropriate to consider selling. But first develop a clear understanding of why that's the case before making any decision, or you might accidentally ditch a business that's still operating exactly as you'd hoped for when you bought its shares.
3. Find the right opportunity for the moment, then act on it
Here's the final thing to do if you've got the sell-off blues: Use the clear headspace you secured by pausing, and the situational awareness you constructed by examining the situation, to determine how to take advantage of the conditions of the sell-off.
A lot of the time, that means buying shares of companies that can be reasonably expected to regain their former value. If, for example, Abbott Labs' stock had been down 10%, it would make sense to buy the dip once you confirmed that the catalyst for the sell-off wouldn't permanently impact its line of business.
On the other hand, if you had reason to believe that its earnings and sales would suffer for years to come, the right move could actually be to sell your shares before things got worse. When the market or a company's operating environment fundamentally shifts unfavorably overnight, the benefit of holding on could be diminished, as you'd just be waiting for more losses. If you want more information on what management thinks about the risk of such shifts happening, checking out the annual report of each of your portfolio companies is a must.
No matter what you decide, it's important to consciously choose to act -- even if your choice is to sit tight for the moment. Once you've taken control of the situation by planning and acting, you'll find that the sell-off blues don't hit quite as hard.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories and CRISPR Therapeutics. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.
