Investing in Stocks With Big Losses
Despite the rationality of cutting losses short, many small investors have been left holding the bag.
They invariably end up with a lot of stock investments that have significant unrealized capital losses.
It's "dead" money at best; at worst, it loses value and never recovers.
Typically, investors assume that they bought the stock at the incorrect time, which is why they have so many significant, unrealized losses.
They may believe it was just bad luck, but they almost never believe it was due to their own behavioural biases.
- Aren't Stocks Supposed to Rebound?
A line that moves from the lower-left corner to the upper-right corner of any major stock index can be seen on a long-term chart.
Over any extended period of time, the stock market will always make new highs.
Investors make the error of assuming that because the stock market will rise, their equities would rise as well.
A stock index, on the other hand, is made up of profitable businesses.
It's a list of winners.
Those less successful stocks may have been been part of an index, but if their value has declined significantly, they will be replaced by more successful firms.
The indexes are refreshed on a regular basis by removing losers and replacing them with winners.
As a result, looking at the big indices tends to exaggerate the average stock's resiliency, which does not always bounce back.
Many companies, in fact, never regain their previous highs, and others even go bankrupt.
- Refusing to Take Responsibility
Many investors resist admitting to themselves that they made a mistake by avoiding 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 escape the regret of a poor decision by doing so.
Many investors intend to hang onto a stock that has lost value until it regains its original value
They plan to sell the shares once they make up for the paper loss.
This indicates they'll make a profit and "forgive" their error.
Many of these stocks, however, will continue to fall.
- Neglect
When stock portfolios are performing 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, especially over extended periods of time.
As a result, 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.
- Hope Is Everlasting
Even when there is evidence to the contrary, hope is the belief in the potential of a happy outcome. In several religious systems, hope is also one of the major theological virtues. Although hope has its place in religion, it has no place in the financial market's cold, harsh reality. Despite the terrible news, investors will continue to cling onto their losing equities, hoping that they would at least recover to their original purchase price. Holding a stock is not based on rational analysis or a well-thought-out investment plan, and praying and hoping for a stock to rise does not guarantee it.