The Stock Market Continues to fall. Do you Buy, Sell, or Hold?
Every stock market in the world is falling with no end in sight. It’s never fun to be watching the markets fall, unless you are shorting the market. So you’re in the hole and are losing money, what do you do? The answer? It depends on your situation.
If everything in life had one simple answer, life would be boring. Even when that’s true, many of us continue to look for answers to questions that cannot have a generic answer. So before you ask what you should do with your stock portfolio, or any investment portfolio for that matter, you should understand the type of investor that you are.
How much money do you have to invest? How much of that have you already invested? How comfortable are you watching your portfolio lose 10%? 20%? 50%? How much do you know about the stock market? How about the companies of the shares you own? Why do you invest? Do you want income? Capital gains? For fun?
Those are just a few questions of many that you can ask yourself. Once you understand your risk tolerance, you should have a better grasp of what stocks you should be buying. A conservative investor that cannot stand losing 5% of their investment probably shouldn’t be investing in a penny stock that doesn’t have any meaningful data except for the analyst on CNBC that says they “like the stock because it has potential.”
Read this article at Investopedia to understand risk tolerance better.
http://www.investopedia.com/articles/professionaleducation/09/risk-tolerance-personality-typing.asp#axzz1YzcCLJMk
It’s from the viewpoint of an investment advisor, people that manage your money for a fee or percentage, but you’ll still get a very good idea as to what risk tolerance is and get a better feel for who you are.
The Big Decision
So you understand what type of investor you are, you know exactly what you want to do with your investments, and have your goals in place. Honestly, if you know that much, you probably don’t need someone telling you what to do. But we’re all human and we want advice where we can get it.
I recently wrote an article about the market falling, and after that the market recovered a bit and then fell even more, which is where we stand today (Sunday September 24th, 2011). Will the markets fall even more? Probably. Will the markets recover? Most likely.
The question isn’t about the market falling even more (I’m assuming this upcoming week won’t exactly be pretty) but when will it recover. The market isn’t going to fall forever and eventually it will recover to the levels that you are comfortable seeing. I mainly look at the TSX, since I live in Canada, but this applies to every stock market (whether if it’s the Nikkei, Dow Jones, or LSE) stock markets around the world are pretty strongly correlated at the moment because of the large market forces that are driving the markets.
Again, it depends on the type of stocks you are invested in, and who you are as an investor, but if you have a solid portfolio that is well diversified and brings in decent dividends, I’d say sit on it or add to your portfolio.
At least here in Canada, we have solid stocks that are paying extremely nice dividends at the moment. This applies for the US as well. I usually never give stock recommendations but I’ll give you an example of a stock that is looking pretty nice at the moment.
The biggest company in Canada, Royal Bank (Ticker: RY) has been hit hard the past few weeks and is sitting at $46.09. It’s paying a decent 4.69% divided and has and EPS of $4.11 while the P/E is at 11.0x. Could it fall further? Sure, but it does have the potential to easily move back above $50, and in the meantime you could be collecting some pretty sweet dividends. A 10% return on an extremely solid stock in the next few months? I don’t think that’s too bad a deal.
Fear is driving the market. It doesn’t help when organizations like the IMF are telling us that the world is in trouble. We get it, we’re not stupid. But even then, people overreact to things that they cannot see and this keeps pushing the markets down further. Where there’s fear, there’s opportunity. If you can, just hang in there and collect those dividends because eventually things will make a turn for the better, and you’ll be thanking me that you didn’t take that hefty loss. Just make sure you’re invested in sound companies that aren’t directly affected by what’s going on in the world (namely the Eurozone crisis).
Good luck!
Wall Street Photo by germeister
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09 August 2011
