"Cut your losses short and let your winnings run," is one of Wall Street's most lasting adages. Although this is sound advice, many investors tend to ignore it, selling stocks after a tiny profit only to see them rise again, or keeping a stock with a minor loss only to see it lose significantly more. No one will acquire a stock with the expectation that it would fall in value and be worth less than what they paid for it. Buying equities that fall in value, on the other hand, is an unavoidable part of investing. As a result, the goal is to reduce rather than prevent losses. Successful investors distinguish themselves from the others by recognising a capital loss before it becomes out of hand.
Despite the rationale for limiting losses, many small investors are nonetheless left holding the bag. They always wind up with a lot of stock investments that have significant unrealized capital losses. It's "dead" money at best; at worst, its value plummets and never returns. Typically, investors assume that they acquired the stock at the incorrect moment, which is why they have so many significant, unrealized losses. They may feel it was just poor luck, but they almost never believe it was due to their own behavioral biases.
Many investors resist admitting to themselves that they made a mistake by postponing selling a stock at a loss. They choose to keep a losing position because they believe it will not be a loss until the stock is sold. They prevent the regret of a poor decision by doing so. Many investors want to hang onto a stock that has lost value until it regains its original value. They plan to sell the shares after they recoup their losses on paper. This indicates they'll make a profit and "forgive" their error. Many of these stocks, however, will continue to fall.
When stock portfolios are doing well, investors treat them as though they were well-kept gardens. They demonstrate a strong desire to manage their finances and reap the benefits of their efforts. Many investors, on the other hand, lose interest when their equities remain stable or decline in value, particularly over extended periods of time. As a consequence, these meticulously kept stock portfolios begin to exhibit symptoms of wear and tear. Many investors do nothing at all instead of filtering out the losers. Instead of reducing their losses, they typically let them grow out of control due to inertia.
Having a defined investing plan with a set of guidelines for both purchasing and selling stocks can give you the discipline to sell equities before your losses get too large. Fundamental, technical, or quantitative considerations might be used to develop the approach.
Having a stop-loss order on your equities, especially the more volatile ones, has been a common piece of advice on this topic. The stop-loss order keeps emotions in check and keeps your losses to a minimum. Once you've set your stop loss, don't change it as the stock price falls. When the stock price is rising, it makes more sense to change the stop price.
It's usually a smart practice to take remedial action before your losses deteriorate. Although it is not always feasible to prevent losses in investing, smart investors acknowledge this and strive to reduce rather than eliminate them.
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