As a financial advisor, nothing pains me more than to hear these words from investors. But more often than not, after experiencing a significant drop in value from a stock, individual investors have this misdirected belief that waiting for the price to return to what they bought it for is the most prudent decision.
This is one of the primary drivers behind why individuals often feel incapable of investing successfully. But rather than look at their own behaviors, they find it easier to blame Wall Street, the government, the banks, or the person that gave them the advice in the first place. In many cases, you may have purchased the stock of a very good company, at the very wrong time. Go back to the late 90’s and look at what some very good company stocks were trading for (Microsoft at $55, Cisco at $77, HP at $66 – compared to $25, $28, and $18 respectively today). However, there is a simpler way to make hold or sell decisions on a stock.
The natural emotion is to hold on to your stocks until the very bitter end, painfully waiting for the moment when you will no longer capture a “loss”, since you never sold the stock. But remember, there is opportunity cost in holding on to that stock, and potential tax benefits that are being foregone. Rather than using emotion in your decision process, the logical question that should be asked is “if I had this money in cash today, would buying THIS stock be the most prudent investment decision?” If the answer is “no”, then you have made your decision. Most often, there is good reason for why the stock has dropped in value. If that’s the case, it might make more sense to lock in the loss (and potential capital loss for tax purposes) and seek out a better investment. In other words, there may be a better alternative than your current holding that would get your original investment back to “even”.
Remember, what happened in the past is irrelevant. The market doesn’t care (or know) what you paid for your stock. As we approach year-end, it might be worthwhile to crack open those November brokerage statements, and see if you can generate some tax losses before year-end on stocks you have been hanging on to for too long.
Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 email@example.com. You can also view his personal finance blog athttp://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.