Help, I Bought a Stock Dud! — What Now?

By Tim Lemke on 27 April 2015 1 comment

We've all bought a stock that has failed to perform as expected, and we may have even lost a good chunk of change in the process. When you realize you've bought a "dud" of a stock, it's natural to feel a bit helpless. But things may not be as bad as they seem. Consider these ways to handle a bad stock investment:

1. Wait it Out

Unless you need the money soon (or you suspect the company is going out of business), there's not much downside to holding onto a stock, since the price will almost inevitably rise again. In fact, this is the approach most experts recommend — buy and hold a stock, staying steady through the dips.

A company that seems like a dud now might have a great turnaround later. Consider Facebook (NASDAQ: FB). Its much-anticipated initial public offering in 2012 was a bust, and the stock languished below $30 per share for months. Now it's trading above $80. (Disclosure: I own some shares of Facebook stock.)

2. Sell, and Buy Something Better

If you've lost your patience with a stock, it can under some circumstances be fine to consider investing your money elsewhere. But consider the cost implications of selling — such as short-term capital gains taxes, trading fees, and the costs associated with the new stock or fund. And once you sell, don't look too hard at the performance of the stock you unloaded — you might go crazy.

3. Sell to Balance a Capital Gain

If you have other stocks that you've sold for big gains, you can avoid a tax hit by selling your dud stock. In fact, if the losses exceed the gains, it can offset taxable ordinary income, as well. This is called tax-loss harvesting, and it's a great way to offload some underperforming stocks while avoiding a tax bill.

4. Buy More

Are you sure the stock is a dud? Or is it just undervalued? One man's "dud" could be another man's bargain. As the great investor Warren Buffett once said, "The lower things go, the more I buy."

For example, some experts recommend buying energy stocks now for this reason. While these stocks have been pummeled of late by low oil prices, they'll eventually rise again, and this may be a good opportunity to buy these stocks on the cheap.

5. Give it to Charity

If it stresses you out too much to hang on to a bad stock, give it away. There are many tax advantages to donating stock, and charities often like receiving stock because of the potential for increased value. And they won't be on the hook for any capital gains.

6. Get More Diversified

You shouldn't worry too much about a "dud" stock if you have a wide range of investments. Seek to hold a good mix of large, midcap, and smallcap stocks in various industries, and no single stock should comprise a significant percentage of your portfolio. It may also be worth it to explore international investments, real estate, and bonds. Index funds are an easy way to get diversified. The point is that if you have a good mix of investments, that underperforming stock shouldn't be a major source of anxiety.

7. Sell Short

If you are completely convinced a stock won't go up in value, you can profit off its poor performance by betting that its price will go down even more. When you short sell a stock, you borrow shares at one price, then buy them for real when the price goes down. This can serve as a hedge against the ownership of other shares that have lost value. It's important to note that short selling can result in big financial losses if you bet wrong, so it's truly a strategy for more experienced and well-funded investors.

What actions do you take when your stocks underperform?

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Guest's picture

"5. Give it to Charity"

That's an awesome suggestion Tim. I've never thought of that.

Before, when I bought a dud stock I would feel like a complete moron, hide from it and hope it went up....until it didn't and I couldn't take it anymore and I would just sell for a major loss (I lost 50% of my overall portfolio once)

For me, buying dud stocks convinced me to get professional help creating an investing plan. That was by far the best investment I ever made (beyond learning how to manage my personal finances).

What do you think about getting professional help to craft an investment plan?