Selling Those Losers

As the stock market stumbles in and out of bear-market territory, many buy-and-hold investors are gritting their teeth and hanging on, hoping that their stocks or funds that are now in the cellar will make a comeback. Market history tells you that it will happen eventually, but it also tells you that some of those turkeys will never be eagles again. So why not sell them?

One reason investors resist the urge to purge their portfolios, say some investment advisors, is psychology. Selling a losing stock or fund is an admission that you made an error in judgment, quite possibly a very big one. Many investors would rather hold on to a stock or fund that’s under water than dump their losers and feel foolish. Other investors may be reluctant to sell because of an unpleasant past experience; they once unloaded a losing stock or fund and it immediately took off, and they’re not going to let it happen again.

Most financial counselors advise you to take another look at the reasons you bought a stock or fund in the first place before you sell it. Investors who see a stock go up right after they get rid of it may have sold for the wrong reason—often a panic sale after a steep drop. But if you go back to your research on the stock and see that the fundamental reasons for buying it haven’t changed, you may be better off holding on. In this area, even the pros get it wrong. Some studies have shown that only three out of ten money managers do extensive research on a stock before deciding to throw it overboard.