The stock market can be a brutal place and even large cap blue chip stocks such as Telstra Corporation Ltd (ASX: TLS), AMP Limited (ASX: AMP) and QBE Insurance Group Ltd (ASX: QBE) can experience jaw dropping share price crashes.
At times, this is because Mr Market is being unreasonably fickle and in other cases, there is a genuine change in circumstances that justifies the drop.
So should you double down and dollar cost average down your cost basis if shares you own get crushed?
Here is how I like to approach it for my own portfolio:
- Generally, I prefer to look for new opportunities elsewhere and continue to hold the losing position.
- Whilst it might sound counter intuitive, I prefer to add to winning stocks (read as winning businesses) rather than losing ones.
- I try to understand what is happening in the underlying business and the impact it might have on the company's long term prospects.
- If the company's long term prospects of outperforming remain solid and it is a high quality business with low debt, I will consider adding to the original position.
- Whilst not quick to double down, I'm also not quick to sell. I usually give my shares sufficient time to prove the investment thesis over a longer period.
Risks
My approach is not fool proof (excuse the pun). In some circumstances, it could lead to either missing opportunities to buy great businesses at discounted prices or it could also lead to holding losing companies for too long.
Either way, there is no shortage of great businesses out there and I believe that focusing my efforts on identifying and buying more of them will play a much bigger role in helping my portfolio to outperform the market.
Foolish Takeaway
If you focus on buying a diverse portfolio of great businesses and holding them for the long term, the gains from the winners will likely more than compensate for the losses from the losers.
One place to start looking for your next great investment opportunity is to read our report on this emerging new trillion dollar technology.
