What to Do When a Stock Drops 20% After You Buy It

You spent weeks researching a stock. The valuation looked compelling, the thesis was clear, and you felt confident enough to buy a meaningful position. Two weeks later, the stock is down 20 percent. Your stomach drops. You cycle between three impulses: sell everything to stop the bleeding, hold and pretend nothing happened, or buy more because it is even cheaper now. All three impulses are emotional. None of them are a framework.

What you need in this moment is not conviction and not panic. You need a decision tree — a structured process that separates the signal from the noise and tells you what to do based on evidence rather than feeling.

Step 1: Separate Price Decline From Thesis Decline

The first and most important distinction is whether the thesis has changed or only the price has changed. These are fundamentally different situations that require opposite responses.

If the price dropped because the broader market sold off, or because of sector rotation, or because of a short-term news event that does not affect the company's long-term earnings power, your thesis is probably intact. The stock is cheaper than when you bought it, but the business is the same. In this case, holding or even adding to the position can be rational.

If the price dropped because the company reported disappointing earnings, lost a major customer, announced a regulatory problem, or revealed that the competitive dynamics you were counting on have shifted, your thesis may be broken. In this case, the 20 percent decline might just be the beginning, and holding on is not conviction — it is denial.

The distinction requires honesty. Go back to your original thesis. What were the specific reasons you bought? Which of those reasons, if they changed, would invalidate the investment? Compare your original expectations against what has actually happened.

Step 2: Review Your Position Size

A 20 percent decline on a three percent portfolio position costs you 0.6 percent of your total portfolio. Uncomfortable but manageable. A 20 percent decline on a fifteen percent position costs three percent and may have concentrated risk beyond what your framework allows.

Check whether the position, at its new size, still fits within your portfolio construction rules. Position sizing review also matters if you are considering averaging down. Adding to a declining position increases concentration. Before buying more, calculate what your total position size would be after the addition and whether that aligns with your risk management rules.

Step 3: The Decision Tree

Based on steps one and two, you now have four possible scenarios.

Thesis intact and position size appropriate: hold the position. Do nothing. The hardest action in investing is often no action, and this is one of those moments. Review the thesis again in 30 days.

Thesis intact and you want to average down: this can be rational, but only if you had a predetermined averaging-down plan before the decline. If you defined buy-more triggers at the time of purchase — for example, add 50 percent to the position if the stock drops 20 percent with thesis intact — then execute the plan. If you did not have such a plan, be very cautious. Averaging down on the fly is one of the most common ways investors dig themselves into deeper holes.

Thesis broken and position size manageable: sell. Not tomorrow, not after it recovers a little. Sell now. A broken thesis does not repair itself because you want it to. Every day you hold a position with a broken thesis, you are making an active choice to own a stock you would not buy today.

Thesis broken and position is oversized: sell with urgency. This is the highest-risk scenario. An oversized position with a broken thesis can cause significant portfolio damage.

KeepRule's checklist and scenario tools walk you through this exact decision tree. When panic is clouding your judgment, having a structured framework on screen — one that asks specific questions and routes you to specific actions — replaces emotional flailing with disciplined process.

Common Mistakes After a 20 Percent Drop

The first mistake is panic selling without analysis. Selling is sometimes the right answer, but selling because of fear rather than analysis is almost always wrong. The 20 percent decline may be the market offering you a better price on a great business. If you sell without checking the thesis, you might be locking in a loss on a position that would have recovered.

The second mistake is averaging down on a broken thesis. Buying more of a fundamentally impaired stock does not improve your situation — it doubles your exposure to the problem. Averaging down only makes sense when the thesis is intact and the decline is driven by factors unrelated to the company's long-term value. If revenue is declining, competition is intensifying, or management has lost credibility, a lower price does not make the stock a better investment.

Preparing Before the Drop Happens

The time to build your 20-percent-drop protocol is before it happens. When you enter a position, write answers to these questions: What specific developments would break my thesis? At what price would I consider adding to this position, and under what conditions? At what loss level would I exit regardless of thesis? How does this position fit within my overall portfolio risk limits?

When you have these answers written in advance, a 20 percent drop becomes an execution problem, not a decision problem. You already know what to do. You just need to do it.

Action Steps for This Week

For each position in your portfolio, write a one-paragraph thesis and a specific list of thesis-breaking conditions. Define your averaging-down criteria in advance — under what conditions would you add, and what is the maximum total position size you would allow? If you currently hold a stock that is down 20 percent or more, run through the decision tree above this week. Do not delay. The framework exists to be used.

This content is for educational purposes and does not constitute personalized investment advice. Always conduct your own research and consider consulting a qualified financial advisor before making investment decisions.