I just read an article titled Why Investing With Emotions Doesn’t Pay Off that I had flagged a couple days ago as maybe having something my readers would find interesting. Everything started off pretty well. It was the standard stuff about not making emotional decisions with your investments. No surprises there.
Then I hit a part where the author, who indicates she’s some kind of financial planner, talks about a client wanting to move money out of equity funds and into a money market. The client wanted to wait out the market uncertainty and wait for things to turn back around (I don’t know when this event took place).
Here’s the response she provided:
I explained to my client that he has not yet realized the investment loss, currently it is only on paper because he has not yet sold the investments. I advised him against selling any of his investments because the current market value was a lot less than his actual cost (book value).
Has not realized a loss? Only a paper loss? I’m sorry, but if the value of your assets has decline, you have taken a loss.
So the advice here is not to realize a loss? Notice there’s nothing in there in terms of actual strategy. The author just doesn’t want her client taking a loss. This is the sort of attitude that kills traders and investors alike (“I’ll get out when it comes back”, etc.). I agree with the article’s basic premise that emotional decisions should be avoided (wrote a little about that yesterday), but there’s nothing wrong with taking a loss. In a lot of cases it’s the best thing you can do.