The ASX stock market is often full of surprises, sometimes good and sometimes not. So when many investors are bailing out of a stock, should we also exit?
Volatility is the price of being invested in shares. They aren't term deposits – their capital value can go up and down.
Of course, we don't necessarily want to sell our investments prematurely, but we also don't want to hold onto a business that's on its way to going broke.
It's usually good advice to "hold onto your winners" because the best businesses have a habit of continuing to win. Certainly, I wouldn't sell something just because it has risen. Businesses like Xero Limited (ASX: XRO), REA Group Limited (ASX: REA), and Pro Medicus Ltd (ASX: PME) have generally been rising for many years, though that's not to say they're cheap buys today.
But when ASX stocks go down, I'd ask a couple of key questions before even considering selling, even if many other investors are exiting.
Is the whole ASX stock market falling?
ASX shares will occasionally collectively fall, and that can seem pretty scary because there's usually an event that causes that fear. We've seen this with a global pandemic (COVID-19), huge financial worries (the GFC), or the strongest inflation for decades (2022).
If swathes of ASX stocks are falling hard and being sold indiscriminately, then that doesn't particularly worry me. It can seem alarming, but the past has shown it's worthwhile staying positive during those difficult times.
In fact, I get excited during those times because it can be the best time to invest. There are some great businesses being offered at much lower prices.
I don't want to let the wider market movements influence my own decision-making, particularly if there's nothing going permanently wrong at the company I'm invested in.
As Warren Buffett once said:
Be fearful when others are greedy and greedy when others are fearful.
Is the decline cyclical?
Sometimes a company will release an update that was worse than expected, or tell the market about something bad that wasn't expected at all.
There are some industries that can see large swings in demand, like resources or retail. We just don't know when the decline (or upswing) is going to happen.
With cyclical industries, I believe we can find great opportunities when a hefty sell-off has occurred. Buying a good ASX retail share when households have closed their wallets could be an effective contrarian play in my mind.
That said, I'd only consider businesses that are growing their operations, such as growing the store network or working on improving margins in the longer term. Certainly, I want to see that businesses are increasing their underlying value.
Again, a heavy decline for a cyclical business could mean it's a compelling time to invest.
Foolish takeaway
I believe it's probably a good idea to hold onto good businesses during a widespread ASX stock market crash.
Certainly, cyclical declines should be expected as that's what happens with cycles. If we're thinking about selling these names, it'd be better to think about it when times are good, not when a crash has happened.
If there's something going wrong for a particular business, it could be worth considering potentially selling if it seems as though the company doesn't have a good chance of recovering, but every case is different.
Sometimes company-specific problems can be resolved. For example, Qantas Airways Limited (ASX: QAN) was really struggling during the worst of COVID-19 but it has since recovered very strongly.
