As a financial advisor this sentiment is one of the most frustrating things I have encountered over the years. Generally this is expressed by in connection with individual stocks. Many investors are reluctant to book a loss on a holding until the price recovers to the point where they have at least broken even.
Some investors are just incapable of admitting that they made a poor investment choice. This mindset can be a roadblock to investment and financial success.
I typically ask whether they would make this investment today. What happened in the past is irrelevant. The only consideration is your estimate of how this holding will perform going forward.
There is a huge potential opportunity cost of holding on until your investment breaks even. Could you have deployed these dollars elsewhere and earned a better return by booking the loss and moving on?
I generally subscribe to the use of an overall asset allocation for clients built from their financial plan. But that said, each investment holding needs to have a role in the portfolio. If the reason for keeping a particular holding in the portfolio changes I suggest eliminating or reducing that holding to my client.
Overall my message is that individual holdings are irrelevant. What matters is the overall portfolio and how that portfolio is performing relative to the client’s risk tolerance and relative to the financial goals that it is designed to fund.
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It would be deadly to the portfolio’s longevity.
Very interesting tips for a diversified and profitable portfolio! Thanks for sharing.
Thanks for your comment.
Very interesting indeed.
You see it over and over Roger: People let their emotions cause them to make poor risk/reward decisions. I have written an aritcle titled "Loss Aversion Bias – Selling Stock at a Loss" for anyone interested at:
http://blog.arborinvestmentplanner.com/2011/05/loss-aversion-bias-selling-stock-at-a-loss
Ken thanks for the comment and the link.
Some business owners are looking for reliable and trustworthy financial planner to handle their financial problems. We should keep in mind that we should learn how to manage our own money as well.