Friday, 27 November 2015

The Loss Phobia: Why Booking a Loss Isn’t a Bad Idea

The other day I was talking to someone. He told me how his portfolio had an investment that wasn’t performing. In fact it had been over a year that the investment wasn’t performing. He also understood the problem with the investment, yet he wasn’t willing to part with it. Why? Because he was making a loss of some 2-3 percent on it. He wanted the investment to come back to the purchase price so that he didn’t have to book a loss on it. Maybe he was suffering from the loss phobia, and, mind you, he isn’t alone. Many of us are programmed to see losses on investments as something unacceptable or as a blow on our egos.

When it comes to investing, booking a loss is the part of the game. Talking specifically about stocks, you can’t have all your bets right on target. Some of them will go haywire and run into losses. Just because a stock has run into losses doesn’t mean that it’s a bad stock. It’s actually normal for stocks to fluctuate (in many cases wildly) up and down. However, when the company backing the stock does poorly, it may be necessary to sell the stock. Stock Market Investing for Employees discusses in detail how you can deal with such stocks and know when to wait and when to sell out.

The core point is that selling at a loss isn’t a bad thing. It’s about appreciating the fact that you are invested in a bad stock and coming out of it timely so that you can contain your losses. To emerge out as a winner in the investing game, your performers need to outdo your nonperformers by a sizable margin. So, you need not be correct all the time.

The longer you stay invested in a bad investment in hope that it will someday come back to your purchase price, the larger your “loss” will be. This is because you will forgo other good opportunities in the meantime in which you could have invested the money that is stuck in the bad investment. Losses are a normal part of the business world. Many good companies also run into losses at times. When you invest in the market, you are in the business world as well. So, you should see losses as part and parcel of the game and not as something that you should be ashamed of or should try to nullify.


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