Study your investment holdings and don't let a bad stock hold you down | Retire on Track
I had a neighbor who put his house on the market for what I believed was an ambitious amount. The housing market in my area was doing well but not well enough to support the price he was asking. His reasoning came down to the fact that he had paid a certain amount for the house and made significant upgrades to it since then, and he deserved to be compensated for it.
My neighbor turned down the first offer, which was for several thousand dollars below the asking price. Then silence. He eventually had to cut the price and finally sold his home for less than his first offer.
This was a prime example of "anchoring," a common bias that causes a lot of harm to investors. When we anchor, we set an irrational benchmark price for something. In my neighbor’s case, he was anchored to a selling price that was based on what he paid for the home and that allowed him to be fully compensated for the upgrades.
Investors often anchor their selling prices for stocks based on the purchase prices. In market downturns, this can cause investors who have lost money on the stock to continue holding them. It also can mean buying a stock at a great price but selling it even though it remains undervalued.
But what you paid for the stock yesterday has nothing to do with what the stock is worth today. And what the stock is selling for today has nothing to do with what the stock should sell for tomorrow. There’s nothing wrong with holding a stock you’ve lost money on if the stock’s fundamentals support it – it might even make sense to buy more of it. But you should base your selling price on the company’s underlying worth, not on what you paid for the stock.
This behavior has hurt both Main Street investors and, to a lesser extent, professional portfolio managers. Besides anchoring, another reason we don’t sell when we should is that we don’t want to admit when we’re wrong. Many of us would watch a stock crater and pray for a recovery than sell the stock and put the proceeds toward one that offers a better potential return.
After hitting a recent low in mid-June, the S&P recovered over the next two months. Don’t let the 17% increase lull you into complacency. If you’ve lost money on some stocks, there’s no guarantee that prices will come all the way back to what you paid.
A stock’s price falls for all sorts of reasons, sometimes because of valid long-term concerns and sometimes for reasons that have nothing to do with the stock’s quality. Down markets are opportunities to study your holdings and replace losers with higher-quality stocks selling at reasonable prices.
Get comfortable with selling at a loss if you have a chance to make more in the long term with a better stock. Don’t weigh your portfolio performance down by having irrational targets for your holdings.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way, Suite 119, Lakewood Ranch, FL 34202.
This article originally appeared on Sarasota Herald-Tribune: EVAN GUIDO: Don't let a bad stock weigh down your investment goals
