With stocks down 20% and bonds off 14% for the year, it can be tempting to avoid looking at your account statements of late, writes Jason Zweig in an article for The Wall Street Journal. While looking at the losses can’t change them, it can serve as a stepping stone to making good decisions in a volatile market.
Since the end of March, when U.S. and international stock funds contained $19.3 trillion, investors have withdrawn a scant 0.4% of their money, in spite of rampant inflation and an overall decline in stock prices. Part of the reason for that is inertia, Zweig contends; many investors are simply on autopilot, while others are too scared to change course. Investors may choose instead to do nothing and ignore the losses, holding onto the vain hope that it will all work out in the end—or make the even worse move of panic-selling and putting the money from the sale into an even bigger loser. It’s no wonder that bear markets cause a kind of paralysis in many investors.
A recent study that examined how online traders utilize stop-loss orders—automatically selling off an investment if it drops to a preset price—which should, in theory, limit your losses. But the research found that many investors simply lower the preset price once their investment starts dropping—in essence chasing their losses instead of stopping them at all. 40% of the actions taken by traders who’d set up stop-loss orders were to change their stop-loss thresholds, the study found. And professional investors aren’t much better: because they tend to sell their biggest winners and losers, fund managers lose about 0.8% of their returns on average since those stocks generally go on to outpeform, research shows.
In order to gauge whether or not you’re making good selling decisions, it’s important to track both the investments you hold onto as well as those you sell, the article maintains. If you’ve sold off something that is now outperforming what you’re hanging onto, you are selling the wrong stock—and that’s something you’d be likely to miss if you’re not looking at your account statements. It can be difficult to know when to quit, but in order to make peace with stock market losses you need to plan ahead, Annie Duke, the author of “Quit: The Power of Knowing When to Walk Away,” told The Journal. She says to devise “kill criteria,” or a set of conditions that an investment must meet in order to hold, and commit to selling it when it fails to. For example, if those investors who bought bitcoin last year as a hedge against inflation, by installing kill criteria to, say, sell it if you lost at least 25% when inflation is over 5%, you would have avoided most of bitcoin’s 60% decline this year.
So while buying and holding is typically the right path to take, selling off the losers in your portfolio doesn’t mean that you’re a loser too, Zweig concludes.