Trader looks at market graph 311 (R).
(photo credit: REUTERS/Tony Gentile)
“One cannot too soon forget his errors and misdemeanors; for to dwell upon them
is to add to the offense.” – Henry David Thoreau
With most stock markets
off their high levels, many investors have been holding onto losing stock
positions for a long time.
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 more than 12 years ago, at the top of the Internet bubble,
and some others he bought about 6 years ago, a year before the financial crisis
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 that he was waiting
to sell them until they got back to his initial purchase price.
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 strategy.We all make mistakes
Let’s say that 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 that the stock has dropped.
So you decide to follow the policy of being patient. As time goes by the stock
The stock market may be moving up, but you will find
yourself stuck with a loser. In fact, 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 mistake.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.
holding onto a losing stock will only cause the investor financial
In economics, this situation is referred to as opportunity cost.
Opportunity cost is defined as the cost of an alternative that must be forgone
in order 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. In fact, for many investors, tax-loss selling may be the most important
way to reduce their tax bill.
If done correctly (be sure to speak to your
accountant before making any trades), it can save the investor money.
example, if a person has a gain in “Stock A” and he decides to sell it, he will
be taxed on that gain in full. But if he has a loss in “Stock B” that he
actualizes by selling, he can use the amount of the loss and offset it against
the gain in A, drastically reducing the taxes he owes.
This might not
recover the entire loss, but it certainly cushions the blow.
licensed and experienced financial advisers can help you evaluate objectively
whether you are holding bad positions. It is also worthwhile working with an
accountant to create a tax-efficient portfolio.
investors live by the credo that you should ride your winners and dump your
The reason is simple: if the stock is probably performing poorly,
the company is not performing up to par.
This indicates that is probably
a good idea for you, the investor, to look
elsewhere.Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people with US