If you noticed a decline in the value of your portfolio yesterday, there's one very likely culprit.
Shares in microchip giant Nvidia slid by 17% on Monday, sparked by investor worries that Chinese artificial intelligence firm DeepSeek presented stiff competition for American AI companies.
Even if you don't hold individual Nvidia shares, you may have felt the sting. Because of Nvidia's enormous size, movements in the company's share price have an outsize impact on markets. Going into Monday, the stock was among the top-15 holdings in 469 exchange-traded funds, according to VettaFI. The tech-heavy Nasdaq Composite index slid 3.1% on the day.
For investors in broadly diversified portfolios, a decline — even one the size of Nvidia's — is considered an opportunity to stick to the plan and keep investing. Because stocks have historically trended upward, downdrafts are largely seen as opportunities to buy into the market when it's on proverbial sale.
For investors who own Nvidia, or any individual stock, the decision is muddier. After all, a stock could take major losses and then soar to new heights à la Apple. Or you could buy a falling stock that becomes the next Blockbuster.
"Buying because the stock price has gone down without knowing some of the underlying issues or without understanding some of the underlying activities could be problematic," says Clark Bellin, president and chief investment officer at Bellwether Wealth.
"Something can be on sale for a reason."
Money Report
How to approach a beaten-down stock
Remember, experts advise against making wholesale changes to your portfolio to try to capitalize on any one investment. But if you have a well-diversified portfolio with a sleeve of individual equities, a stock that has fallen precipitously may be an attractive add. You'll just have to figure some things out before you make a decision, says Sam Stovall, chief investment strategist at CFRA.
"Any time you have a big selloff in a stock, the question is, will there be more declines in the near future, or is it an overreaction that represents a very attractive buying opportunity?"
Investment pros recommend these three steps to help sort things out.
1. Have a process in place
There are thousands of stocks to choose from, and investigating ones that make financial headlines isn't a great way to narrow things down, says Bellin.
"The tendency for a lot of people is to see the dip, then try to do the research to see if it's something they want to add," he says. "That's sort of doing it backwards — and that's going to cause some problems."
Rather than scrambling to do research, he says, keep a watchlist of stocks you'd be interested in buying at the right price. That way, you have already done your homework by the time the price slips. You merely need to make sure your thesis on the stock is still intact before pulling the trigger.
"If some thing on your target list goes on sale, go ahead and add a little more to your position," Bellin says. "Just make sure you're not overweighting your position. You want to have a fairly well-diversified portfolio."
2. Check the numbers
A stock can hit the skids for a variety of reasons. Maybe the company fired its CEO. Maybe it sunk money into a new product line that the public didn't like. Maybe investors have soured on a whole sector, and a company has been dragged down alongside its peers.
No matter the reason, it's important to dig into the company's underlying fundamentals to see if it's a stock you want to hold over the long term, says Charles Rotblut, vice president of the American Association of Individual Investors.
"Look at what's been happening. Look at gross margins and operating cash flows over a period of time," he says. "See what direction things are headed in. Is this truly a one-time blip? Or has it been a gradual worsening that now appears to be accelerating?"
If the company has major earnings problems, it may be wise to take a wait-and-see approach, says Stovall.
"It's not something that tends to go away very quickly," he says. "A company has to respond to the issues there, but a lot of times, they won't do enough the first time around. Sometimes it will take two or three attempts until the issue is fully resolved."
3. Reassess your outlook
Beyond the numbers, you'll have to decide if whatever short-term problems that have dragged a stock down represent a meaningful long-term threat to the company's business.
Ask yourself if investors are overreacting to a problem that's fixable. It's not an uncommon occurrence, says Raife Giovinazzo, a portfolio manager at Fuller & Thaler Asset Management, a mutual fund firm that focuses on financial psychology.
"People overreact, in general, to vivid, emotional stories," he says. "And there's nothing quite so vivid and emotional as losing money."
One way to tell if the public is overreacting negatively on a stock is to see if higher-ups at the company are buying — a move that must be publicly disclosed and is available on free sites such as Nasdaq and Yahoo Finance.
"The No. 1 thing we start with is insider buying or share buybacks," Giovinazzo says. "That's the event that says, hey, management is not just saying that they think that there's an overreaction — they're actually doing something about it. They're putting their money where their mouth is."
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