One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it lose even more.

No one will deliberately buy a stock that they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to investing. The objective, therefore, is not to avoid losses but to minimize losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out frꦗom the crowd and show you how to ident💞ify when you should make your move.

Holding Stocks With Large Losses

In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it's "dead" money; at worst, it drops further in value and never recovers. Typically, investors believe the reason they have so many large, 澳洲幸运5官方开奖结果体彩网:unrealized losses is that they bought the stock at the wrong time. They may also believe that it was a matter of bad luck, but seldom do they believe it is because of their own 澳洲幸运5官方开奖结果体彩网:behavioral biases.

1. Don't Stocks Always Rebound?

A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The 澳洲幸运5官方开奖结果体彩网:stock market, over any long-term 💎period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners.

Those less successful stocks may have been part of an index at one time, but if they've dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Therefore, looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some even go bankrupt.

2. Refusing to Accept Blame

By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they've made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its 澳洲幸运5官方开奖结果体彩网:purchase price. They intend to sell the stock once they recover this 澳洲幸运5官方开奖结果体彩网:paper loss. This means they will break even and "erase" their mistake. Unfortunately, many of these same stocks will continue to slide. Using options, an investor may be able to 澳洲幸运5官方开奖结果体彩网:mitigate some of their losses on a losing stock.

3. Neglect

When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They sh🦹ow great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for longer-term periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.

4. Hope Springs Eternal

Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold, hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out 澳洲幸运5官方开奖结果体彩网:investment strategy, and, unꦉfortunately, wishing and hoping a stock will go up does not make it happen.

Realizing Capital Losses

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. Hope is not a strategy, and an investor has to have a logical reason to hold a losing position. What you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock's underlying 澳洲幸运5官方开奖结果体彩网:fundamentals, and its future prospects.

Let's look at a few ways of assuring a small loss does not become dead money or turn into a much larger loss.

Have an Investment Strategy

澳洲幸运5官方开奖结果体彩网:Having a written investment📖 strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be🅷 based on fundamental, technical, or quantitative factors.

Have Reasons to Sell a Stock

An investor generally has quite a few reasons for buying a stock, but typically no set boundaries for 澳洲幸运5官方开奖结果体彩网:when or why to sell it. Don't let this happen to you. Set reasons to sell stocks and sell them when these reasons occur. The reason could be as simple as: "Sell if bad news is released about corporate developments, or if an analyst lowers the 澳洲幸运5官方开奖结果体彩网:price target."

Set Stop Losses

Having a 澳洲幸运5官方开奖结果体彩网:stop-loss order on shares you own, particularly the more volatile stocks, has been a mainstay of advice on this subject. The stop-loss order prevents emotions from taking over and will lim🔯it your losses. Importantly, once the stop loss is in place, do not adjust it as the stock price moves lower. It makes more sense to adjust the stop price when shares are moving higher.

Ask: Would I Buy the Stock Now? 

On a regular basis, review every stock you hold and ask yourself this simple question: "If I did not own this stock, would I buy it today?" If the answer is a resounding "No," then it should be sold.

Tax-Loss Harvesting Strategies

A 澳洲幸运5官方开奖结果体彩网:tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive 澳洲幸运5官方开奖结果体彩网:tax credits that can be used to offset taxes on your 澳洲幸运5官方开奖结果体彩网:capital gains.

The Bottom Line

Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses is not always possible, but successful investors accept this and try to minimize their losses rather than avoid them. 澳洲幸运5官方开奖结果体彩网:Selling a stock at a loss and receiv▨ing a taxꦅ credit is one benefit you will receive. Selling these "dogs" has another advantage: You will not be reminded of your past mistake every time you look at your investment statement.