- Facebook stock fell by nearly 20 percent in a single day in July.
- Snap experienced both an extreme surge and an extreme drop in stock value within a four-month period.
- Investors in FB stock and SNAP stock can adjust their investing strategies to better weather highs and lows.
Many investors were taken by surprise when Facebook stock fell by nearly 20 percent in a single late July day. And investors in Snap, the parent company of Snapchat, had to endure a collapse of more than 50 percent from the company’s high in early February to its low in May.
Although no investor would choose to incur those types of losses, these types of stock price movements can be used as teaching mechanisms. Here are eight tips for investing in stocks that you can take away from the recent movements in Snap and Facebook shares.
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1. Understand the Stock Market and Fluctuations in Facebook Stock and Snap Stock
You might have heard that the stock market returns about 10 percent per year on average, and that statistic is accurate. It’s rare, however, when the market actually returns 10 percent in a single year. It’s not at all uncommon to have a year when the stock market gains — or loses — 30 percent in a calendar year, so seeing fluctuations in individual stocks like the kinds Facebook and Snap have exhibited in 2018 are not at all unusual. The key for investors is understanding whether these sell-offs are short-term events or if the long-term health of the company is in jeopardy.
2. Review Your Risk Tolerance — Facebook Stock and Snap Stock Might Require More
The stock market can be a risky place to put your money. Although long-term returns are good, short-term trading patterns can be very volatile. In the bear market year of 2008, for example, the S&P 500 index lost over 35 percent. If you’re a long-term investor and can ride out these types of losses, the stock market can still be a good bet for you.
But if just the thought of a 50 percent or greater loss — or a 20 percent loss in a single day — turns your stomach, you might not have the risk tolerance to put your money in stocks like Facebook and Snap. Be honest with yourself. You don’t want to lose sleep over your investment portfolio.
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3. Keep Some Powder Dry — Don’t Put All Your Cash in Facebook Stock or Snap Stock
Sometimes, stocks sell off for a good reason. If Facebook users decline, it means not as many people are using the service. This is likely to trigger a fall in revenue and profits, which can rightfully drive the price of Facebook’s stock down. However, if a company’s long-term investment story still checks out, it’s prudent to have some extra cash available to investing during sell-offs. For example, investors who bought Facebook stock shares when they sold off in March 2018 still have a 20 percent profit, even after the stock’s recent sell-off.
4. Know What Moves Your Stocks — for Snap, It’s User Growth
Generally, stocks rise and fall based on their earnings. For a company like Snap, which is still losing money, other metrics must be used. User growth is an important indicator for Snap’s stock price. In early 2018, Snap stock shares slumped on news of the company’s controversial redesign and fears over competition from the likes of companies such as Instagram. In its August 2018 earnings report, Snap shares initially popped as revenue growth met Wall Street estimates. But those gains quickly turned to losses when the company indicated the number of users had fallen since the first quarter. Keeping tabs on user growth is essential for potential Snap investors.
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5. Diversify Your Stocks Beyond the Tech Industry
Putting all your eggs in one basket is a risky strategy when it comes to investing. As recent declines in both Snap and Facebook’s stock price demonstrate, on any given day, you can lose a significant amount of money. But by having your money spread out over different asset classes, such as bonds, stocks and cash, you can reduce the risk of your overall portfolio. In a properly diversified portfolio, some assets are going up while others are going down, lowering your account’s overall volatility.
6. Invest in Stocks Outside the Tech Industry
In addition to diversifying your asset classes as a whole, try to own stocks from different industries as well. If you own Snap and Facebook, adding Apple, Amazon and Google to your holdings won’t help you reduce your risk much, as those stocks are all in similar industries. Although individual stocks don’t trade in lockstep, industry stocks tend to move in the same direction. For true stock diversification, invest in companies from non-correlated industries such as healthcare, energy, real estate or finance.
7. Have a Long-Term Perspective on Stocks Like Snap and Facebook
The stock market can be hard to predict for short-term traders. But if you buy solid companies and have a long-term perspective, you can be rewarded for your patience. Over time, the stock market is a much calmer place.
For example, over a rolling 12-month period, the biggest stock market gain has been 162.9 percent, whereas its biggest loss has been 67.6 percent, which is a huge disparity. But the disparity shrinks dramatically when looking at rolling 20-year periods. Over that time frame, the greatest average annual gain was 18.3 percent, whereas the smallest average annual gain was 1.9 percent. The same is true for stocks like Facebook and Snap. Over time, day-to-day volatility smooths out.
8. Dollar-Cost Average Your Facebook and Snap Stock Shares
Rather than trying to time the market, which even experts cannot do consistently, invest regularly. Through a process known as dollar-cost averaging, which involves investing a certain amount on a consistent basis, you’ll end up buying more shares when a stock is down and fewer shares when the stock is up.
For example, if you buy $150 of Snap shares at $15, you’ll have 10 shares. If the stock price later drops to $10, your $150 will buy you 15 shares. Now, your 25 shares have an average cost of $12 per share. This investment method also protects you from the temptation of trying to time the market.
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More on Investing and Stocks
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This article originally appeared on GOBankingRates.com: Dumping Facebook and Snap Stock? Here’s Your New Investing Strategy