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Stocks have been falling – what should investors do?

It’s never easy as an investor to watch the value of your stocks fall. While the feeling of watching them appreciate is incredibly satisfying, it is one of the worst feelings to watch them in reverse. Investors were reminded of this pain yesterday as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) suffered its worst daily loss in over four months, plummeting 80.1 points or 1.5% with not one sector spared.

While the benchmark index climbed over 15% over the course of 2013, it has yet to show such strength in the early stages of 2014. So far, it has fallen from 5352.2 back to 5212 points – a decline of 2.6%. While that might not seem that bad, a number of stocks have fallen much further.

Take Forge Group Limited (ASX: FGE) as a perfect example. Entering November last year, its stocks were sitting at $4.40 each. After emerging from a nearly four-week-long trading halt, its shares hit a low of just 28.5c. While they made a partial recovery in recent weeks, its price fell 18% yesterday back to just $1.025 as they released yet another writedown.

Similarly, each of Australia’s largest iron ore miners hit the skids last week. After rallying strongly in the second half of 2013, the commodity’s price fell to its lowest level in five months at US$130.70. Fortescue Metals Group Limited (ASX: FMG) dropped 10.7% and has continued its decline this week, while BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) also declined 3.5% and 6.9%, respectively.

Shareholders in other strong companies like QBE Insurance Group Ltd (ASX: QBE), Westfield Group (ASX: WDC) and Brambles Limited (ASX: BXB) have also been reminded of the feeling in recent months.

However, it is in these times that investors need to remain at their most disciplined by not letting the element of self-doubt takeover, whereby they sell in a state of panic. There are certainly times where heavy stock falls are justified, and it is then that you need to ask yourself whether it is time to accept the loss and get out. Other times however, the sell-off can be exaggerated and by selling in a state of panic, you are selling your shares at the very bottom of the plunge.

Instead of focusing in on the share price alone, investors should ask themselves if the foundations of their investment thesis on a company in question has changed. For instance, does the business still have good growth prospects? Can I still trust the company’s management with my investment? It is by asking these questions that you can help to ease your nerves and regain your composure.

Foolish takeaway

By investing for the long term and ignoring short-term price fluctuations, not only can you capitalise on the growth and dividends paid by a company, but there are also capital gains tax incentives to be realised! While it is painful to watch the value of our shares drop (even if it is only in the short term), investors are encouraged to trust their investment case and act only if they believe that the company’s long-term prospects have been altered or if they think their money would be better served elsewhere.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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