So the recent dip in the markets has a few investors panicking. Some that bought during the run-up in the previous months are starting to see their portfolios going into the red. Most probably, they were thinking if it is a good idea to hold on and average down or just sell.
Over the years, I have met several people over who have held on to bad businesses and losing stocks in their portfolios and not knowing what to do with them.
I guess it is because people look at such stocks and think that they already in a deep loss with no benefit in selling it now. Another way that people see is that they will keep the losing stocks in deep freeze and only sell when they are able to get their capital back.
Well, this second thought is what creates a lot of “forced” long term investors – people who stay invested in a bad stock for the long term because they don’t think they have an option to sell it.
This is because nobody likes losing.
But then again, why do they still hang on to their losing investments?
Selling makes them feel even worse.
It is found that the pain of a loss is substantially greater than the pleasure from a gain.
People will go to great lengths to avoid pain. Accordingly, our inclination when facing a financial loss is to convince ourselves that the asset is going to bounce back and we will at least break even.
“It’s only a paper loss,” people would convince themselves. “It’s not a real loss until I sell.”
So what do we do with our losing investments?
Your cost price does not matter when you decide what to do with a stock in your portfolio now. What matters is today’s stock price and what is the expected returns from it over the next 5 to 10 years. If the stock price (for those on your portfolio with huge paper losses) is not attractive enough for you to buy more today, sell it. Don’t hang on to the hope of breaking even. Chances are that there are better ways to invest your money.
Another clue as to when to sell is if the company is no longer a “good” business or is no longer well managed. If your original investment thesis is no longer valid, you can consider getting out of the stock. If the fundamentals start to deteriorate, get out before your losses become even greater.
It doesn’t make much sense to keep obsolete goods in inventory for your store; neither should you keep losers in your investment portfolio.
Recognizing your losers is hard because it’s also an acknowledgment of your mistake. However, it’s important to do that sooner than later. Don’t be afraid to swallow your pride and move on.
It’s never too late to start again.
Oh, and here’s wishing Singapore a happy 54th birthday!