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Stocks Don’t Have the Same Memory as Investors

May 12, 2016

Just because a stock went down, doesn’t mean it will go back up. Yet, many investors hold on to losers waiting for them to return to the price paid so they could sell without taking a loss.  Or, they want to hold until it returns to their previous high.  This makes no sense.

There is no reason for a stock to increase back to an earlier price unless the fundamentals improve. However, waiting causes opportunities to be lost. A question to ask yourself is if you did not already own that stock whether you would buy it at the current price. Any negative response should lead to selling and reinvesting the proceeds in something you feel is priced properly.

On some level, I believe the values of groups of stock return to the mean over periods of time – about ten years. One way of verify this is to look at any annual report where they show the long term performance of their Company’s stock along with their peer group and the S&P 500 Index. The peer groups usually track the index and while they could be higher or lower, the graphs have the same ups and downs. A lone stock that is not a dog will have a similar tracking over that ten year period. Assuming I am correct, why stick with one stock that is under-performing waiting for it to go back up rather than shifting to a fund either in that sector or in the broad based market giving you a chance at the sector or market returns.

Upgrading by selling can enable you to take the loss for tax purposes. If the stock has high gains, albeit lower than they were, why not consider donating the shares to a donor advised fund lightening your exposure and freeing up cash you would use for charitable contributions to buy new stock funds.

Nothing is perfect, especially with investing. However, you should try to do sensible things based on solid plans and goals with a dispassionate objective eye on how your portfolio gives you a better chance of success, reduced exposure to losses and a more sustainable cash flow. And remember that stocks don’t have a memory!

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