As a financial advisor, I am all too familiar with the story of the
investor who rides a stock up to the peak, only to ride right back down
to where they started from, if not lower. We call it a round trip and
it is very tragic to watch.
Some investors take the strategy
of selling off their stock once they hit a certain percentage of
return. A common benchmark is to sell off half when the stock doubles,
so that they can avoid a loss if the stock declines.
Personally,
I believe in keeping a portfolio in a position for maximum performance
for the risk taken. I dont agree with avoiding individual stock loss at
all costs as a prime directive towards managing a portfolio.
Lets
say you buy 1000 shares of XYZ for $5 or total invest of $5,000. You
ride it to $50. If you kept your original position, youre sitting nice
with $50,000. If you sold out of your position when the stock doubles,
you are sitting at $27,500. You paid a $23,500 opportunity cost to
dodge taking a round trip.
In reviewing the play, who was
right and who was wrong? Its a judgment call in each scenario. Consider
these questions: how much of your net worth is tied up in this
position, would you buy this stock now if you did not currently own it,
how close is your portfolio to your magic retirement number, are there
other investments of the same profit potential that you could diversify
into, will this be taxable, what your estate planning options, and
other factors.
There is a fine line between being a greedy
gambler and a calculated risk factor. Maintaining your objectivity and
not being caught up in the emotions of the moment is vital. It is sad
to see a young investor who has the opportunity to be at the brink of
retirement twenty years ahead of time blow it because he decided to
double down. It is just as sad to see the retiree struggling to get by
because he punched out of technology in the early nineties well short
of his retirement goal because of fear. Bottom line there is the pain
of discipline and the tears of regret. If you constantly fail to view
your situation with a certain degree of detachment, while maintaining a
prudent man outlook, you will run your portfolio off target in the long
run.
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