In my previous articles, I wrote about what I do when the mutual funds I am accumulating in my NISA account go down.
In my case, I have never sold a mutual fund simply because its value dropped.
Even if it drops by 10% or 20%, I basically continue to accumulate it just as I did before.
So, is it the same for individual stocks?
Actually, it is completely different.
With individual stocks, I sometimes cut my losses when the unrealized loss becomes significant.
To begin with, I do not treat these two as the same type of investment.
When I buy, I think, ‘If it drops by about 10%…’
When I buy individual stocks, I don’t necessarily set a clear stop-loss line.
However, in the back of my mind, I do think,
‘If it drops by about 10%, I’ll consider withdrawing.’
I at least think that much.
However, when it actually drops by 10%, I don’t always end up selling.
Sometimes I end up holding onto it without being able to do anything.
This is because, in the first place, I bought the stock believing it would go up.
Even if it drops,
‘Maybe it will go up eventually’
that feeling remains.
Of course, my belief that it will go up has absolutely no effect on the stock price.
I know that much.
Even so, when your own money is actually decreasing, it is hard to act exactly as you initially planned.
And then, when it drops further and you can no longer bear it psychologically, you sell.
Looking back, it is not rare to think, “I should have cut my losses sooner.”
Individual stocks can move much more significantly than you imagine.
Of course, it is not just declines that I have experienced with individual stocks.
Triggered by things like earnings reports, there are times when a stock opens with a special buy quote or hits the daily price limit high.
They can rise much more than you expected.
I think this is also one of the charms of individual stocks.
However, the opposite is also true.
I have experienced several times where a stock with disappointing earnings opened the next morning with a special sell quote.
There are so many sell orders that a price is hard to establish, it hits the daily price limit low, and the day ends without a single trade being executed.
The next day also starts with a special sell quote.
There were times when it dropped even further from the point where I thought, “Surely it won’t go lower than this.”
With low-volume stocks, I have even seen them drop to the daily price limit low on the same day after hitting the daily price limit high.
I still don’t really understand why it moved that much.
When you have experiences like this,
“I’ll just cut my losses if it drops 10%”
you realize it is not as simple as saying that.
Even if you intend to sell at a 10% gain, there is no guarantee that you will be able to sell at that price in the first place.
Even so, I rarely average down.
There is also the idea that if the price drops significantly, you should buy more while it is cheap.
This is what is known as averaging down.
I rarely do this with individual stocks.
Based on my experience so far, I do not believe I have much of a knack for stock investment.
My initial judgment that it would go up might be wrong.
In that state,
I am cautious about investing more funds, thinking,
No, this company should eventually go up.
That is why, even when the wound has deepened, I am more likely to withdraw than to buy more.
The difference in diversification between mutual funds and individual stocks is significant.
So, why don’t I think the same way about mutual funds?
The biggest reason is the difference between being diversified versus investing in a single company.
In investing, there has long been a famous analogy: Don’t put all your eggs in one basket. If you put all your eggs in one basket, they will all break if you drop the basket. The idea of diversification is that if you split them into multiple baskets, you won’t lose everything if you drop one.
The mutual funds I am accumulating in my NISA are widely diversified across many companies.
Even if one of those companies drops significantly, it is only a small part of the total assets I am invested in.
On the other hand, with individual stocks, the money invested in that company is directly affected by the price movements of that company.
If my judgment about that company was wrong, other companies will not compensate for it.
That is why for me,
a widely diversified mutual fund and holding stock in a single company have different meanings, even if both drop by 10%.
Of course, there is no guarantee that a widely diversified mutual fund will always recover.
Even so, I feel more at ease holding it than individual stocks where I am invested in a single company.
To begin with, the intended holding period is also different.
Another big factor is the investment time horizon.
I am accumulating mutual funds with the intention of holding them for a long time from the start.
On the other hand, I do not buy individual stocks with a set period in mind, such as “I will hold this for 10 years.”
I buy them expecting a price increase without setting a specific period.
In other words, I am not buying mutual funds and individual stocks for the same purpose or on the same time horizon.
That is why my actions when they drop are also different.
Cutting losses is not necessarily the right answer either.
So, should I just cut losses on individual stocks quickly?
I think this is not that simple either.
I myself have had times when the stock price recovered right after I cut my losses,
and I thought, “I shouldn’t have sold.”
I have felt that way before.
It is not that rare for a stock to bounce back right after you sell it.
Conversely, there have been times when I held on, thinking, “It has surely fallen too far,” only for it to drop even further.
Ultimately, no one knows what the stock price will do next at that point in time.
That is why I do not want to talk about “selling automatically when it drops by a certain percentage.”
When mutual funds drop, I basically continue my investment plan.
When individual stocks drop significantly, I consider withdrawing at some point.
Even though it is the same “price drop,” my judgment differs.
That is because what I am buying, how much it is diversified, why I am buying it, and how long I intend to hold it are all different.
“Should I sell when it drops, or should I keep holding?”
Instead of just looking at the rate of decline, I first consider what I bought and with what intention.
I try to think from that perspective.
In this note, I will write about how to think about things that NISA beginners often find confusing, while also incorporating my own experiences. Please take a look at this as well.