1. The market correction in recent days has demoralised many investors. Some may not even want to look at their portfolios at all.
2. Why the portfolio always look red? In short, it is due to the disposition effect – investors tend to sell winners and keep losers.
3. Think about this. A stock has gone up 10% in a few days, there is a tendency to want to take profits in case the profits ‘disappear’. The mind might be thinking “10% in a few days instead of waiting for a year, sell now!”
4. Or it could be another scenario where the stock has gone up 10%, came back to the buy price, and subsequently go up another 10%. The tendency to take profits is even higher because profits have disappeared before and you don’t want to let it happen again.
5. During a major correction is even worse. Investors are likely to sell stocks that are profitable while keeping those in deep losses. The fear of locking in whatever profits left is immense while confronting the deep losses is too painful. So they take profits quickly.
6. When it comes to a 5% loss, investors will think that it is just a small drawdown and it is normal to experience some volatility in the market. This is not scary.
7. When the loss becomes 20%, investors will start to wonder what’s happening but would still hold on to the investments because selling means realising the loss. Not selling means there’s a chance that the share price might rebound.
8. When the loss becomes 50%, they resigned to be long term investors. What it really means is that they expect to wait for a long time for the share price to rebound.
9. When the loss becomes 90%, they have mentally given up on the stocks. But they will still hold and give a reason that it is not worthwhile to sell at all. The inaction is likely due to the pain of confirming the huge loss.
10. If all the winners are sold and the losers are kept, it doesn’t take a genius to know that the portfolio will look red all the time.
11. The solution is not to make selling decisions based on gains and losses. If you are a fundamental investor, you should be focusing on the underlying business. If the business has deteriorated and you know it has become a wrong choice, you should sell it even if it is a 50% loss.
12. This is also true even if you are a trader focusing on price movements. You are suppose to cut loss when it is time to cut and not hold on and allow the loss to grow bigger.
13. There is a lot of pain now as the US market is dropping like a rock with each passing day and it is not easy to think straight. Some investors are at a loss, should they sell or hold. There is a high chance that even a red portfolio can have stocks that are worth keeping and stocks that are deserved to be rid of.
14. Remember some stocks will never go back to your buy price, even in the long term. These companies generally do not have the fundamentals to perform or even survive given enough time. So you should identify and sell them early. Not keep them because of the fear of confirming big losses and harbouring the hope that you can sell for a breakeven.
15. Money is fungible. You don’t need to make back the money the way you lose it. You can sell a losing stock and move the capital to another stock and make profits. Such times will test your honesty with yourself.
