SELLING LOSS-MAKING INVESTMENTS
1. Ground reality
· Many investors assign a lot of importance to choosing the right investment to buy.
· However, selling is not given similar importance, and investors are reluctant to book losses.
· Moreover, the eagerness to buy a chosen product may actually result in a wrong decision.
· Aversion to booking a loss is stronger in investors than booking a profit, because of the feeling of regret about having made a wrong decision.
· Portfolios suffer more from being bled to death by wrong choices, than because of the failure to buy the right investment at the right time.
2. Reasons
· We fail to consider the performance of the investment in isolation.
· We always think our decision is right, and try to seek information for reinforcing it irrationally.
3. Repercussions
· Although long-term investing is good, holding losing investments for a long period is bad.
· If we refuse to sell a wrongly selected investment, we are harming ourselves financially as we miss the efficient use of the locked capital for the entire portfolio.
4. The way out
· Sensible investing is about ensuring that capital is always put to work.
· This requires releasing capital from a loss-making investment and putting it to an alternative use.
· The first step to overcome this limitation is to identify what we should sell, by revisiting our investment rationale and assumptions when we bought our investments and see if it holds.
· If the investment was bought merely for appreciation without backup facts, sell it.
· Secondly, we should not assume that waiting will always give us an honourable exit.
· If we know that we have a rotten apple, we should get rid of it to protect the portfolio.
· Thirdly, we should realize that selling at a loss releases valuable capital which can be deployed in something that is working.
· It should be used to recoup the losses of the earlier bad decision by reinvesting sensibly, based on facts or research and not on another impulsive whim.
· If this realignment is done at the bottom of a bear market, it can help when the bull market returns.