A stock declines. What to do?
Stocks go up and stocks go down. That’s life. Their prices vary like the weather or the tides. That is natural and common, and to be expected.
So, to remain sane and not overly stress myself, I have accepted this ever-changing rythm that stocks go through. If I was of the mindset that prices would forever be stable, I would quickly become frustrated, angry, and unable to function.
Since maintaining my ability to function is a goal of mine, I have realized that the fluctuations of the market are normal and typical.
What to do
Therefore, if the ups-and-downs of the market are normal, how do I acclimatize myself to this situation?
There are a few ways I have found that I use to keep me on solid ground. Since I am diversified, I know that one or more bad days for one or a few stocks are normal, and that it also means that some of my other holdings are experiencing positive growth.
Some days it rains, some days it is cold, and some days are sunny. That is how life is on earth. Stocks are not divorced from reality.
I also know that a decline can be a positive thing. A lower price means that my dividends will buy more shares compared to a higher price. A lower price might mean I may consider buying more shares.
I look at many factors when deciding what to do. I check the dividend payout ratio. I look at price/earnings ratio. I look at where the stock’s price is compared to its 52-week range. I look at the current and historical earnings per share. I check news for recent articles on the company. I check financial websites for whatever insights I could glean.
A dividend payout ratio that changes rapidly is a caution. A dividend payout ratio that is over 100% is a caution. A price/earnings ratio higher than average is a caution. A price significantly higher or lower than its historical limits is something to look at with caution. An earnings per share number that is lower than average is a caution.
Caution is something to value. It makes me consider where to (or not to ) deploy money.
For me, buying shares is not an exact scientific exercise. For better or worse there are numerous factors that come into play. The overall state of the economy, the state of my finances, my assumptions about the future prospects of the company and the industry it does business in … all play a role. And most of the time, I do best by doing nothing.
But sometimes despite numerous cautions, I may determine it is a good time to invest. Buying low means a vote of confidence in the future. It is a risk that has the potential of reward.
How much risk is appropriate for you? Let me know here.
Illiustrated is a Japanese woodblock print from 1855 depicting a catfish (namuzu). Namuzu movements were thought to cause earthquakes. Courtesy National Diet Library of Japan.
The post Risky OpportunitiesĀ appeared first in Smile If You Dare.