Selling losing shares?

seacaitch

Selling can be tricky due to two factors:

1. Psychological: whether you're selling a winner that's "served you well" that you're reluctant to let go of or a loser that's "let you down" in the hope that it'll recover, people have a tendency to form attachments to positions, which makes it easier simply to do nothing.

2. Lack of Strategy: many investors don't have any real investment strategy and as a result behave in an emotional and reactive manner, at the whim of the market's mood, rather than in a methodical and disciplined manner governed by adherence to a plan.

And these two factors become more concentrated when an investor holds individual securities, such as single name stocks, rather than diversified collectives.

For novice investors, the "plan" or strategy often consists simply of hoping that a stock will go up over time. When they find that the stock doesn't behave (ie. go up) in the hoped for manner they are then left with a choice: do nothing, sell, or buy more. This choice becomes very difficult because they have no real criteria, other than the direction of the price during their holding period, with which to assess the stock. Absent any criteria for making a decision, the decision can become either (i) a guess [tantamount to gambling], or (ii) the choice that minimises psychological pain for the investor. The end result is that novices can make poor choices, often buying high and selling lower.

I think novices should steer well clear of individual stocks. But if they do wish to buy them then they should ensure they are doing so guided by a plan which establishes the criteria for what/when to buy and when to sell, and they should follow that plan with strict discipline. The herding nature of markets makes this a lot more difficult to do than to say: market emotions will have you selling when you should be buying and buying when you should be selling. It's very difficult for novices to counter these emotional pressures, and so IMO most would be far better off avoiding putting themselves into that position in the first place, sticking to diversified collective investment vehicles that outsource the majority of this decision making, simplifying the decisions the investor must make, and helping put the (dangerous!) market's emotions more at arm's length rather than up close and personal.

gkerr4

thats right worry them off!! - "they'll lose their shirts" etc...

agree on the 'plan' thing though - anything to remove the emotion from the mix, if you can.