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It’s only a paper loss if you don’t sell

Here’s the sort of attitude about taking losses that ruins traders and investors on a regular basis, advised by a financial planner no less.

Wow!

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.

By John

Author of The Essentials of Trading

4 replies on “It’s only a paper loss if you don’t sell”

What are the rules that were established for this client with respect to losses?

It sounds like the “planner” never discussed it. Reminds me of the time some Japanese institutional investors were visiting various management shops in NY. During a presentation, the management firm personnel discussed their approach to loss-taking. The Japanese folks said, “You mean you expect to have losses”?

The prospect immediately left the meeting and did not return. One assumes that they went on to find a manager who never has losses, realized or not.

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