cut your losses!You worked hard to create a portfolio that should be making you money, but sadly, your stock is losing value. Don’t worry if that is the case, as we all have had times when we one holding was sinking like the Titanic. You want to sell, but you can’t stand to think of selling out of fear if the stock will fall down further or perhaps there is hope you might be able to reduce the loss if the stock tries to go back up. The bottom line is that you want to unload your holding and protect your capital and to reinvest the money in a more profitable stock. No matter how ‘perfect’ your trading strategy is, you can never time the market right and sell high while buying low.

Trying to Break even:
When the dot-com bubble burst in the spring of 2000 and the market started its descent into a bear market, investors froze like deer caught in oncoming headlights. Many didn’t even react until the value of their portfolio holdings had declined by as much as 50-60%. If you read my “about” page, you will see that I was one of these people. I lost almost 80% of my money before I took action and cut my losses which at that point were so deep that I was broke.

There is no promise that a stock will ever come back. Waiting to break even (the point at which profit equals losses) can totally erode your returns. To show the importance of cutting losses, the chart below shows the amount a portfolio or security must rise after a drop just to get back to even.

Percentage Loss vs. Percent Rise To Break Even
10% 11%
15% 18%
20% 25%
25% 33%
30% 43%
35% 54%
40% 67%
45% 82%
50% 100%

A stock that drops 50% must increase 100% to break even! In dollar terms: a stock that drops 50% from $10 to $5 ($5/$10 = 50%) must go up by $5, or 100% ($5/$5 = 100%), just to return to the original $10 purchase price. Many investors forget about simple math and take in losses that are greater than they realize. They falsely believe that if a stock drops 20%, it will simply have to rise by that same percentage to break even.

For those that cannot remember the tech stock collapse year back, just use this table to see how far off some stocks still are. I remember other blogs trying to emphasize the foolish idea of holding stocks that people bought for $25 (like Bank of America) when it was down around $15 claiming a rally will ensue. Instead of cutting losses, and trying to get in lower, these people came all the way down to $2.73/share and have come back up but are STILL below their buy price.

Now using this example in the previous paragraph, if they sold at $15, bought back near the bottom, not only would they have broke even, but would be profiting right now. Its a lesson I took away from the dot-com collapse and hope you consider from this point forward.

Now cutting losses do not really need to take place in the first place if you apply a stop-loss to each holding. Depending on your risk aversion, this might be as low as a few % below your entry price to something like 10-15%. This can also help avoid volatile swings that some stocks produce some trading days.

A selling strategy that’s successful for one person might not work for somebody else. Think about a short-term trader who sets a stop-loss order for a decline of 3%; this is a good strategy to reduce any big losses. The stop-loss strategy can be used by longer-term traders also, such as investors with a three- to five-year investment time frame. However, the percentage decline would be much higher, such as 15%, than that used by short-term traders.

Determine your investing style. If you bought a stock because your uncle’s friends’ grandfather said it would soar, you’ll have trouble making the best decision for you. However, if you actually did research like you should when putting your money to work, the following quick steps will help.


The first question, did you buy a company because it had a solid balance sheet? Were they developing a new technology that would one day take the market by storm? Whatever the reason was, it leads to the second question. Has the reason you bought the company changed? If a stock has gone down in price, there is usually a reason for it. Does the quality you originally liked in the company still exist, or has the company changed? It is important to not limit your research to only the original purchase reasons. Review all of the latest headlines related to the company.

If after some research you see the same qualities as before, keep the stock.

If you have determined that there has been a change, then proceed to the third question: is the change material enough that you would not buy the company again? For example, does it alter the company’s business model? If so, it is better for you to offload the position in the company, as its business plan has greatly diverged from the reasons behind your original investment.

Always remember not to get emotionally attached to companies, and making smart sell positions will become easier and easier. Cutting your losses might be hard to decipher initially but hopefully after reading this article, you will have a better understanding on why sometimes is better to cut your losses!

Happy Investing!

Aman, MBA

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