What to Do if You are Down A Lot on a Position

Traders protect capital by taking small losses. Investors protect capital by having a well-diversified portfolio or buying short-term puts on their large individual stock holdings when market conditions start to deteriorate.

By far, the most frequently asked question I get asked privately via email is some variation of “I am down 30% on such and such stock and I can’t take it anymore. Tell me what to do – take a big loss or hold?”.

I understand the precarious state of the situation. I’ve been there several times in my career. In this case, there’s no point of telling people that they should always use a stop; hope is not a strategy, always have an exit strategy; if you don’t know why you are in a  stock, you won’t know where to exit.

What I usually tell people is that the loss has already happened. Since it is in an individual stock, there are no guarantees that it can’t go lower or that it will ever recover to their break-even point. Now, it is up to them if it will remain just a loss or become a habit-changing lesson.

There is a difference between a drawdown in an individual stock and a drawdown in a well-diversified index. The latter is usually actively rebalanced every year and it tends to recover over time – some do faster than others.

The questions you need to ask yourself are:

1. How much money are you really comfortable losing on this one position? It doesn’t make sense to risk more than 1% of your capital per idea.

2. Would you buy at the current levels again? What is your stop if you do?

3. Why do you need to make money exactly in that name. There are thousand of liquid stocks out there. The odds are that at least several of them offer better risk/reward entry points at the time and have a better potential of making you money.

After a brief philosophical answer, I cut straight to the chase.

Your first loss is your best loss. Staying with a large loser has a detrimental impact on your health and well-being. You get obsessed with this one position and as a result, you miss on so many other good opportunities that the market generously provides every week.

What would I do in your situation? I’d take a the large loss and move on. Then I’d take a few days to recharge emotionally, review past trades, study winners and losers, talk to other traders that have been there.

Trading should be an enjoyable and profitable experience; otherwise, why bother?