Have you heard this line of reasoning before? Maybe you’ve used it yourself to explain why you’re holding on to a losing stock.
Fear of making another mistake (the first one was buying a stock that dropped in price) often keeps investors from cutting their losses before they become big losses.
This is one of the emotions that clouds judgment when investments don’t work out the way we hope. Many investors are optimists by nature – they expect things are going to work out for the best.
Good Attitude
While that’s a great attitude for life, you shouldn’t let it cloud your thinking or obscure the obvious. Here’s what happens way too often:An investor invests $10,000 in a stock hoping for a nice return. Instead, stuff happens and the stock turns the investor’s $10,000 investment into a $5,000.
The investor has suffered a 50% loss, but is going to hold on hoping the stock will earn his or her money back.
Question
Question: What are the odds this is going to happen?The answer: Not good, in fact they’re almost impossible. If you think about the math, the stock will need a 100% gain to get back the $5,000 loss.
Do stocks record 100% gains? Sure, but not that many and it usually takes a long time.
Conclusion
One of my rules is the way to make money in the market is to not lose it. That is don’t let losses become big losses that will take many success to recoup.
I have a two-part series on When to Sell Stocks that will give specific guidance on how to decide when to sell.
