clock menu more-arrow no yes

Filed under:


It's easier getting in than getting out.

The adage applies as equally to marriages and relationships as it does to the stock market.Whether it's because of a hot tip, a desire to get a bigger return or an alternative to low-yielding certificates of deposit, jumping into the stock market seems easier than deciding when to jump out.

Investors often develop emotional attachments to their stocks. Interestingly, the same reasons for holding on to a stock are often used to justify continuing relationships:

-A stock may not be doing as well as expected or has diminished in value, but there is a lingering belief that it will "bounce back."

-Bailing out of a stock would be admitting a mistake in judgment.

-An investor who knows it's advisable to bail out may not have an immediate alternative, so no action is taken.

Allowing emotions to dominate investment decisions can produce a different kind of heartache - the pocketbook wallop.

Observers of investor psychology say one of the biggest rationalizations for not selling a stock is the belief that a paper loss isn't a real loss.

Robert Nicholson, who runs The Nicholson Group, a Miami-based money management firm, said investors need to face the fact that if a stock's price drops they've incurred a loss.

"Waiting for it to come back is a . . . loser's game most of the time," Nicholson said.

Investors reluctant to take losses could be missing a chance to use those losses to cut some of the tax bite from stock profits.

Potential sell signals can vary by investment strategy. Nicholson said investors must decide if they have are short-term, long-term or intermediate traders.

"A long-term investor should be willing to take an 8 percent to 10 percent drop in price because that's likely to happen three or four times a year," he said.

Howard Lichstrahl, managing partner of Performance Capital Management, a money management firm in Hollywood, Fla., said investors shouldn't focus on the price drops of individual stocks without having a sense of what is happening in the stock market.

"The overall market will have a dramatic effort on how one stock will do in price," Lichstrahl said. "Stock prices will vary over time."

Lichstrahl said about 50 percent of a stock's prices is influenced by the performance of the overall market, while 30 percent to 35 percent can be attributed to the performance of the industry to which an individual company belongs.

Investment professionals underscore the need for investors to keep informed about developments related to stocks they own. Circumstances change. The original reasons for buying a stock may no longer be valid.

Investors may also want to use "stop-loss" orders to lock in profits. A stop-loss order instructs a broker to sell a stock if it falls to a certain price or below. The trick is determining at what level to set the stop-loss order.

If a stock has a history of volatility, an investor needs more leeway in setting the "stop" to avoid being sold out if the stock market or individual stock has a particularly bad day.

If a stock has shown a generally upward trend, investors may want to adjust the "stop" accordingly, setting it at gradually higher levels.

At times, an investor may see a stock fall to the stop-loss level, at which time the stock is sold, only to see the stock climb later.

This can be frustrating for an investor, but the alternative could be worse: a possibly steep slide in a stock's price without any mechanism in place to lock in profits.