Cut Loss or Average Down? (止损或者拉低成本?)
The writer believes that most people will think about this question when the stock price dropped just after you bought it: whether to cut loss or average down? To be honest, there is no absolute answer as everyone has different confidence level, risk management and holding power.
During the shortest bear market in March, the writer believes that most people are very panic about their stock because share price has been dropping at least 50% from their peak, some may have their profit evaporated, and some may even suffer loss. Hence, most people may choose to sell most of their stock by that time, as uncertainties surfaced and more lies ahead. Little do they know, the market rebound just a week after and the uptrend continue until September.
So, back to the question, what shall we do if history do repeat? Since that awful experience, the writer will make sure he will always have a healthy cash position, where never go all in into stock market nor cash out everything. When there is really a market crash, assess the stock you are holding, and if you think that the company you possess will not be affected by much, hold the company or consider add some when the price is so low, hence averaging down the cost.
On the other hand, when you are not confident towards a company’s fundamental when you first bought it, selling it will be the best option, but do note that never sell when the market is crashing. You shall sell or reduce when the market has a slight rebound, but never when the whole market is dropping. The writer experienced both, being able to buy some shares after the slight rebound, but also suffer losses from panic selling during market crash. Hence, experience taught me that never repeat the same mistake, always remember the following:
Never all in
Always assess a company’s fundamental, hold or add if it is good
Never sell when everyone is also selling, you will definitely regret
Be greedy when others are fearful
These lessons really help when subsequent minor crashes happened. For example, glove sectors crashes twice, DJI dropped 1800 points and more to come. In short, manage your risk well, have faith in companies you invested and do the complete opposite as others when necessary.
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