By Eric Reich
In conversations with investors over the years, I’ve heard one common “plan” from investors countless times, and that is, “This stock has been a terrible buy. When it comes back up to what I paid for it, I’m going to sell it.”
This is arguably the worst investment plan of all time. In 28 years of doing this work, I can count on one hand, with plenty of fingers left over, how many times this strategy worked out.
Why is it so hard for investors to sell their losers? For starters, selling a bad stock is an admission that you made a mistake, which for some people is really hard to do. Studies show that it is far more common for men to make this mistake than women. Shocker I know! As men, admitting mistakes is hard enough, admitting mistakes that caused us to lose money is nearly impossible.
So, what’s so bad about wanting to get back to “even” before I sell?
- The stock is a loser for a reason. I have seen people that have held losers for a decade waiting for it to come back. Well, sorry but it probably never will. The sooner you cut your losses, the happier you’ll be. If it’s been a loser for a long time, and it was going to get better, it probably would have done it by now. Think about that one ex you had! Could you imagine waiting for a decade to see if they get better? Of course they won’t, and neither will your stock.
- The sooner you sell, the sooner you can buy a winner instead. If what you really want to do is overcome the loss you suffered, sell and buy a winner instead. You will be far more likely to get your money back faster by moving on then by waiting with the stock you have.
- Selling a loser at a loss can create a tax write-off of up to $3,000 against your income if you have no realized gains, or an unlimited offset up to an equal amount of gains.
- The sooner you sell losers, the faster you get comfortable with the process. The first time is the hardest. After a while, you realize that the entirety of the market is made up of winners and losers. You just have to be right slightly more than you are wrong. Think of it like a casino. The “house” only has slightly better odds than you, but that translates to a lot of money over time.
I know it can be challenging to be unemotional with your investments, but removing emotions from the equation will help make you a better investor. While fees, etc. play a part, emotions are the primary driver behind why the average investor performs far worse than the average index. In 2023 alone, the average stock investor returned 20.79% vs. the S&P at 26.29%. That’s 5.5% of underperformance. Worse, it was only for one year. Imagine compounding that out over time. Allowing your emotions to drive your investment choices could quite literally cost you a fortune over time. Take your emotions out of your investment decisions and sell your losers. You’ll be happy you did.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
