Individual stocks are risky because public sentiment affects them in unpredictable ways. The short-term - a few months or even a year or two - makes prediction especially difficult. Sometimes the market likes a report from the company causing the stock price to go up while another time similar news moves the stock price down. That's why index funds are so appealing, and why we encourage our clients to move from individual stocks to index funds.
That said, many clients have favorite stocks that they want to keep in their accounts. Sometimes those stocks have sentimental value because they were inherited or gifted to them. Other times clients have personal reasons for keeping them. As financial planners, we are most concerned with helping our clients meet their financial goals and most decidedly not with beating or timing the market.
We measure clients' probability of success with our planning software and try to match the performance and risk of the portfolio with the assumptions in the financial plan. So long as a favorite stock is less than 10 percent of the value of the portfolio, the added risk usually doesn't significantly jeopardize the behavior of the portfolio so the probability of meeting established financial goals isn't largely affected by movement in that stock's price up or down.
For example, Apple has been a market darling for a while and much of the price appreciation has probably benefited from the herd mentality. When I have spoken with diehard Apple stock fans, it's clear they love the company. People stay on the bandwagon only so long, however, and the over-the-top media coverage of Apple lately will surely affect the stock price. It's not possible to say whether that will be up or down.
In the end, when you hold individual stocks in a volatile market, you need to decide whether to sell or hold based on how you feel. If price volatility is hard to deal with, then selling and not looking back has helped many a harried client in the past. Unless your goals have changed recently, what you decide to do shouldn't materially affect your financial plan.
The key in all of this is to have a well-balanced, diversified portfolio. We recommend taking a pulse of your portfolio and current asset allocation at least once a year. It's even more important to assess your portfolio and rebalance back to your asset allocation after the large appreciation the market has had over the last several years and now that we have entered some very volatile times in the market.
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