Money cash Shekels currency 521.
(photo credit: Reuters)
So it’s been two weeks since I walked on a sidewalk in my
neighborhood in central Jerusalem. The combination of snow, ice and fallen tree
branches has made them inaccessible. Now I know those of you living outside the
capital can’t comprehend what we are going through, but I have gotten to like
walking in the middle of the street at night, with no streetlights, in my black
winter jacket. It’s sort of like a real-life video game, where you need to dart
in between parked cars so you don’t get eaten, I mean, run over.
appears that the powers that be in the Jerusalem Municipality have taken to my
idea of leaving all the trees and branches on the street to be used for Lag
Ba’omer bonfires, neighbors are becoming restless and impatient. They are sick
of the status quo and have started moving the obstacles instead of waiting for
the city to do something. Unfortunately, most people have chosen the top of my
street as their dumping ground, and we now have a pile of branches that measure
about three meters high.
The point is that for most, inertia is not a
solution, and if the situation stinks, one needs to take action and make a
I recently opened up an account with an investor who then
transferred his holdings to me from a well-known brokerage firm. After the
transfer was completed, we sat down to review his portfolio. Some of his stocks
were showing large losses, and he explained that he had bought some of them 14
years ago, at the top of the Internet bubble, and some others he bought about
six years ago, a year before the financial crisis started. He certainly doesn’t
have the best timing! He was aware that the stocks were well below the price he
paid for them, but said he was waiting to sell them until they got back to his
initial purchase price.
I can’t begin to tell you how often I hear that
approach taken. Some investors will hang on to a losing position for years in
the hope that it will return to the original price they paid for it.
Unfortunately, this is not a particularly effective investment
Bad call Let’s say you read about a company that sounded like
an interesting prospect. After doing some research, you decide to invest in this
company because it seems like a winner. But when you receive your first
statement, you see the stock has dropped. So you decide to follow the policy of
As time goes by the stock keeps dropping. The stock market
may be moving up, but you will find yourself stuck with a loser.
chances are that if the stock starts dropping by 10, 15 or 30 percent, there are
problems with the company and it pays to sell. The problem that many of us have,
however, is that it is very difficult for us on a psychological level to admit
that we picked the wrong stock. It’s hard for us to say that we made a
Opportunity cost It is important to note that the longer you
hold onto the under-performer, the more money it costs. The reason for this is
that the investor could have put his funds into something that actually made
money. Therefore, stubbornly holding onto a losing stock will only cause the
investor financial harm. In economics, this situation is referred to as
opportunity cost. Opportunity cost is defined as the cost of an alternative that
must be forgone to pursue a certain action, or the benefits that could be
received from taking an alternative action.
Profit from losses Never
think that all is lost. Some good can actually be derived from losing stock
positions. When the position is sold, the investor realizes the loss, which has
certain tax advantages. The loss can be used to offset other gains, thus
lowering the tax bill.
Many professional investors live by the credo that
you should ride your winners and dump your losers. The reason is simple: The
stock is probably performing poorly because the company is not performing up to
par. This indicates that it is probably a good place for you, the investor, to
Don’t let inertia set in. No emotions; take action and
clean up the fallen stocks from your portfolio.
The information contained
in this article reflects the opinion of the author and not necessarily the
opinion of Portfolio Resources Group, Inc., or its
Aaron Katsman is a licensed
financial professional in Israel and the United States who helps people with US
investment accounts. He is the author of the book Retirement GPS: How to
Navigate Your Way to A Secure Financial Future with Global Investing.