During downturns in a market or a stock, investors may feel an urge to increase their positions in certain loss making stocks that were purchased at peak prices. This may not necessarily be anomalous if your strategy for a particular stock, from the outset, was to keep increasing your holding. However, if you are buying in just to better your average holding price then you may be setting yourself up with false hopes of recovery and very possibly a long period of liquidity loss with heavy losses (or meagre gains) to show in the end.
When faced with a scenario such as this, where a gradual degradation of the stock is likely, you may use one (or both) of the following approaches instead.
1. write off your losses - if you have reason to believe that the stock may continue to suffer and drop beyond your stop loss limit, sell it as quickly as you can. This is a 'must do' strategy for speculative stocks. This will not only free up your capital, but will also allow you a chance to recover your losses by re-investing the released capital in a better performer.
2. consolidate your winners - the best that downturns offer are the bargains. If you have been eyeing a stock that seems like a steal at current levels, then this is your chance to accumulate. You can improve your overall standing by consolidating your position in the winners of your portfolio.
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