What strategy do you favor when it comes to seeing negative stocks on your portfolio? Do you prefer to ‘Cut Loss’ or ‘Average Down’?
Another question: What is your time duration to continue holding a negative stock before you consider changing your strategy?
Hi 🙂 I’ve recently participated in the Philippine Stock Exchange by way of COL Financial Group, an online stock trading / investing platform. Next week, will be my first monthsary with investing in stocks. I still have a LOT to learn about strategies, about the PSE and listed companies, about reading charts, learning fundamental analysis, company valuations, etc. iSensey aims to document and share the journey of a newbie stock market investor in the Philippines.
This is my latest consideration – a fork in the journey that needs a decision: what is the the best strategy to implement when you see a negative stock in your portfolio for some time already, do you hold it for long term, cut loss now, or follow average down strategy?
Stock in consideration is EDC or the PNOC Energy Development Corporation. This is one of the premium stocks hand-picked by COL experts that is recommended for Peso Cost Averaging Strategy.
I know that I’m only holding this stock for just a few weeks now, so ‘right now’ is not enough time to witness how EDC will perform and to make a strategy decision to average down, cut loss, or to continue to hold. Too short a time, you might say.
So why then I am considering making a decision soon?
Source: COL Recommended Stock List for EIP published October 1, 2014. As of 2016, EDC is still part of this premium stock list for Peso Cost Averaging.
If I have bought this stock February 2011 at P5.72 a share, and decided to sell this 5 years after or today at the current market price, it’ll be a losing proposition since last trading day, May 27, 2016, closing price of EDC is P5.66.
The 32, 65, 180 months moving averages looks better though at 5.815937, 5.879077, 5.826077 respectively.
In fact, her net profit for holding EDC from June 2011 to March 2012 only amounts to P30.82, representing a 0.65% gain. After buying her initial EDC stock, she bought 2 more times using the ‘averaging down’ strategy. She sold EDC after stock registered positive in her portfolio.
Check her 5-years journey with the stock market thru COL Financial.
EDC SHARES | iSensey
The initial price I bought EDC shares was at P5.92/share (1,800 shares) last May 12. I bought 500 more shares at P5.75 per share a week after. Currently, the average price of my EDC stocks is P5.9066 as of May 27, a paper loss of 4.94%.
CUT LOSS or AVERAGE DOWN?
What is the Cut Loss strategy when it comes to investing in the stock market? Cut Loss is taking a hit – selling your stocks at a price lower than your buying price, which will result to losing money instead of taking profit. Lugi ka pero benta mo pa din. The underlying strategy is that you can use the “freed-up amount”, the proceed of your selling the negative stock, to buy a potentially more profitable stock.
*The chance to recoup the money loss for the negative stock is there especially if the new replacement stock bought gives you exceptional gain.
Some stock investors also use this strategy especially if they feel that the stock’s price will not rise even after xxx months – the period of time they are willing to stay invested in the currently negative stock.
What is the Averaging Down strategy in stocks? Averaging down on a stock experiencing down trending price means after buying the initial price of a stock at a certain price – your ‘control’ price, you will buy again the same stock when the price becomes much lower than the price you first bought it. This will effectively bring down the average price per share of your total number of stocks. And hopefully when you average down enough, it will be faster for you to time the market to sell your stocks at a profit even how little the profit will be.
This is because you will be gunning for a ‘lower price’ target to sell your stocks versus if you did not average down, you will still be aiming for a higher price to sell your stocks.
How Averaging Down works?
Check screenshot for my initial buy of EDC stocks, average price is P5.9375, net of buying fees. When I bought shares again at P5.75, the average lowered to P5.9066. Now, if I will buy again at even lower prices the average price per share will also decrease further.
DECISION TIME – Choosing the most fitting stock trading strategy
At this junction, I can do either: Cut loss sell my shares at the market price on next trading day, loss some money in the process. Or Average down then wait to time the market for a little profit. Or hold the same number of stocks and do nothing until target selling price is meet.
This is what I am going to do for now for strategy – Cut loss if EDC portfolio loss hits 10%, or hold and keep the stocks for 6 months more and sell right away if it turned green on or before November 2016, whichever comes first. Not planning to buy more EDC stocks to average down even though fundamentals and valuations are really bright for this company.
UPDATE JUNE 23, 2016: I changed my mind and did Average Down for EDC and the result? PROFIT! Lumipad ang EDC kaya nakapag – Lock in Profit! 😀
Stock Market Journey of a newbie! Exciting times! Wish me luck friends, hehe.