None of us like to admit defeat. Many investors are reluctant to sell stocks that are underwater in hopes of a rebound. After all, if you don’t sell, it isn’t a real loss, it is only a paper loss. Right? I heard a CEO of a large investment firm once respond to that question by saying, “Yes, green paper with past presidents pictures on it.” I’ve never really understood the term paper loss. The bottom line is that your account is worth what it could be liquidated for today. Whether you sell your losing position or not, it is worth the same amount.
If you are following a disciplined asset allocation strategy, then you may want to buy more of your losing position when you rebalance your account to bring the allocation back to its target percentages. In theory, rebalancing your account will result in buying low and selling high, which is a strategy that rational investors should pursue.
On the other hand, if you have taken bets on individual stocks or segments of the market and they’ve since turned South and your only reason for not selling is because it would make your stomach turn, you should consider whether selling and cutting your losses is the right move. I know people that can not bring themselves to sell a losing position. They have literally been waiting eight years for some technology stocks to rebound to where they bought them prior to the tech bubble busting in 2000.
Not only can selling your losing positions be to your advantage from an investment standpoint, if you’re selling them in a taxable account you will be able to use the losses to offset other gains. You shouldn’t be afraid to sell a loser because it will turn a paper loss into a real one. Holding on to that dog in hopes of a future recovery may have you forgoing a better opportunity. Set expectations up front, if they don’t pan out, consider selling. Every professional trader has closed a losing position.
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