Howard Lindzon calls it the Great Roundtrip. Depending on when you bought certain assets, it might feel more like the Great Freefall. Funny how varied entry points can change perspectives. In any case, what Lindzon is referring to is the return to pre-pandemic pricing for many of the sexy names of the last 22 odd months. So what do you do when your growth stocks stop growing (or, depending on when you bought, never grew at all)? Your options are simple: do something or do nothing. Your answer might depend on how you positioned yourself on the ride up.

Do you own any shrink stocks?

By a show of hands, where my fellow toppers at? When you buy a growth stock at or impossibly near the top, the growth you had anticipated has the opposite effect: you instead experience shrinkage in your portfolio.

So a stock—or a group of stocks—that you believed in at a much more expensive price is suddenly available at a much cheaper price. That’s good news for the buyer, isn’t it? It would be smart to average down on your position and pick up more of this stock on the way down. If it keeps going down? Great! Even cheaper. And if it keeps going down after that? Well, then it starts to hurt.

For a volatile individual name, the thought process is as follows:

Losing 10%: buy the dip!

Losing 20%: lol darn I topped it, time to lower my cost basis

Losing 30%: ack yeah this was really dumb and obvious, starting to sting a bit

Losing 40%: oh man I better blog about this, turns out I am not comfortable with risk after all

Losing 50%: shit this actually sucks  

And so on and so forth. A 50% loss is usually the point at which I’m forced to have a conversation with the panic-selling voice inside my head. Very often, this is near the bottom. But by staying invested there’s no guarantee I won’t repeat the above experience and lose 50% of my current 50%.

The pain of individual names

Unlike indexing, which inevitably and eventually will return to previously-seen highs, you simply don’t know with riskier assets and individual names. The wider net you cast, the better your odds are of finding a winner—but make no mistake, you’ll catch plenty of losers as well.

For many, the recent meme/tech/growth/crypto mania serves as their first foray into getting absolutely crushed by a stock. Contrary to popular belief, stonks can indeed go down. A lot. In order to reap the rewards and historically unrivaled returns of the stock market, we all need to be prepared for the downturns—both financially and emotionally.

Market corrections reinforce the beauty of index investing for softies like me who don’t respond particularly well to the mental warfare of individual names. Corrections are also a great time to check off some boxes on your personal finance to-do list and focus on areas outside of the stock market. Do you have an emergency fund? Are you sticking anywhere within the neighborhood of your budget? Do you need bond exposure to help smooth the ride? Is there some speculative meme coin you can throw your life savings into and hope for the best?

Knowing when to HODL and when to FODL

Ben Carlson wrote an excellent post on when to sell a stock that goes down, and I’ll defer to the questions he asks when contemplating a losing trade:

What’s my threshold for pain in an individual name — 30%? 40% 50%? 60%? If you’re a long-term investor expect to see your individual stocks cut in half at least once.

Would I be thrilled to buy this stock at lower prices? This question is much easier to answer when a stock is higher than when it’s lower but this can also help you set your risk profile.

Has the story changed? You can’t answer this if you don’t have a predetermined reason for buying in the first place.

Do I have better investment opportunities elsewhere? Every investment decision — buy, sell or hold — can be viewed through the lens of opportunity cost.

One addition: can you handle the FOMO if you sell and the stock goes higher?

If you can take the pain and still have reasons to believe in the investment, by all means see it through. More than likely, doing absolutely nothing is the best course of action to fight against the emotional experience of a swift and decisive drawdown. But it also depends on how much of your portfolio we’re talking about here. For me, I have been investing about 5% of my assets in more speculative individual names. I quickly discovered that even that amount is more than I’m comfortable with. For you crazy crypto kids, that number might be 50%. To each their own, but know thine self.

In the meantime, embrace the pain. Or hell, ignore it. Close your stock app once in a while. If you can’t do that, deal with it head on. Write about it, even. But most importantly, learn from it.