Unless you’re some phenomenal investor that always picks winners (in which case you’re likely on a beach somewhere not reading this article), you’ve had stocks that have lost you money before. I’ve had them, you’ve likely had them, even the great Oracle of Omaha, Warren Buffet has had them. So, what do you do with your losing stocks? Unfortunately, many of us probably hold onto them, afraid to admit our failure with the hope that one-day they’ll come back. In this article, I’ll try to explain why (although it’s easier said then done) it might make sense to sell them.
I still remember my Econ 101 teacher in college explaining the notion of sunk costs. Something about a candy bar and picking one vs another and how once we’ve made a decision that it shouldn’t have any effect on our future decisions. I refused to accept such a notion and wrestled with the idea of sunk costs until the next test when I wised up and finally understood it (wish I could say I got an A on that test…). Same thing hold true for our losing stocks. We’ve all been there; you do a bunch of research and identify a stock we think has a lot of upside. Turns out we were wrong and the stock ends up falling, counter to our predictions. Instead of calling it for what it is (a stock that’s lost money), we hold onto it, almost refusing to admit our losses and telling ourselves that it’ll ‘come back’. Month after month goes by and we still hold onto this stock, just hoping it’ll one day recoup those losses. In reality, this is a terrible idea! We should apply the notion of sunk costs to our stocks. We should admit that the cost of losing is not something that we can recover and not let that hold us back from making the decision here in the present.
Evaluate your investments forward looking
Jim Cramer always says, “I don’t care where a stock has been, just where it’s going”. Once we’ve gotten past the idea of holding onto losers just so we can recoup those losses, we should evaluate our stocks on a forward-looking basis. Every stock in our portfolio should be put to the test of where we think it’ll go in the future. Just because a stock has been a winner (or loser) in the past doesn’t mean it’ll continue to do so in the future. The same homework that goes into picking new stocks should be applied to your current holdings. Does the future still look bright for your stock? Do you see company or industry as a whole growth and the stock increasing in price? Are the decisions the company is making now going to increase their revenues or margins to help them make more profits? If so, congrats! You’ve come to the conclusion that you think the stock will be a winner and is worth holding in your portfolio. If not, then you probably shouldn’t hold onto the stock any longer. If you don’t think a stock will continue to do well, you should sell it, regardless of how much money it’s made your or lost you.
Thankfully our current tax code (even with the changes moving forward in 2018) allows you to deduct your losses. Conversely to paying taxes on your gains, you can deduct losses on selling your stock. At the end of the year, your brokerage will send you a tax statement detailing both your gains and losses, allowing you to report both on your taxes and pay taxes on the net gains. So, that stock that’s lost you a bunch of money could be sold and allow you to offset some gains you may have had in the year, and more importantly, allow you to focus your money on stocks that you think will do well moving forward!
Take a look at your portfolio and evaluate your winners and losers! Don’t be held back with the feeling of remorse or denial in keeping those stocks that have fallen in value. Identify those stocks that you think will continue growing in value and hold onto those. Get rid of stocks that you don’t see doing well in the future and focus on those that will!
Author Bio: Ben is a blogger at YoungMoneyFinance where he’s on a mission to provide modern, relevant and easy to understand financial knowledge