While there’s no really bad time to kick underperforming stock positions out of your portfolio, some times are actually better than others.
The good news is, if you’re sitting on losing positions, now may be a great time to exit them.
It’s a great time because stocks are near all-time highs. That makes it easier to see which stocks in your portfolio haven’t participated in the recent run-up.
It’s also a good time because some investing themes that saw big gains are fading, some are dead in the water, and others are just starting to take shape.
And with this investing strategy, you can handle those losing positions with confidence.
Let me show you what I mean…
Why You Shouldn’t Be Afraid to Get Rid of Losing Stocks
The length of time you hold a position doesn’t matter as long as it’s working for you. That is, if the price of the stock you own has been rising steadily, or if it pays a good, secure dividend.
Hold onto those positions.
But if your investments are not working for you after giving them a reasonable period of time to do what you expect them to do, chances are they’re not all of a sudden going to explode higher and prove you right.
Too many investors fall in love with their positions. They think the stocks in their portfolio that were once expected to be the next big thing, or that were once high-fliers, will eventually start moving up or will come back after they fall out of favor.
Because there’s no way of knowing whether a “dead in the water” stock will all of a sudden take off, or whether a fallen angel will ever rise again, you’re almost always better off getting rid of those stocks and replacing them with more promising prospects.
I know what you’re thinking… in fact, I know why most investors don’t sell those positions that they think will come back to life. They’re afraid to sell them because they’re afraid they’ll take losses on the positions and then watch them skyrocket to all-time highs.
I say, good luck with that.
Sure, it could happen. But if it doesn’t, you’re left with a big loser. Not only will you not make money on those positions, you won’t have a chance to make money in other opportunities because you didn’t “take the risk.”
That’s how most investors look at selling loser positions – they actually think that selling them is taking a risk!
You can break that bad habit by telling yourself losers hold onto losing positions and winners buy winning positions. So sell your losing position and if it starts to act like a winner again, buy it back.
I don’t like to sit on losers too long. I hate the feeling of being wrong, but I hate losing money more. So I’ll sell my losers, cry for a second, and move on.
After I sell them, I look at them as if they’re new positions I’m interested in. If they act like I want and expect them to start acting, I’ll buy them back.
That’s how you deal emotionally with losers you’re afraid to sell. You look at them like new positions after you sell them. That way you can tell yourself you won’t miss out on them bouncing back to the moon because you’ll get back in when they start moving.
You have to sell losers because that’s the only way to free your mind… and your capital.
Sometimes you’ll want to sell because the stock isn’t performing, sometimes because the investment theme you bought into isn’t working, and sometimes you’ll want to sell because there are better opportunities right in front of you.
A Few Ways to Handle a Bad Position
Recently, we were sitting on a few underperforming positions in my Capital Wave Forecast service.
One position was a gold stock. We got into gold because we saw geopolitical risks all around us, and because central banks have been printing money like crazy, which devalues currencies and over time is a positive for gold prices.
But gold hasn’t performed as we expected it to. So I had my subscribers put down a stop-loss to sell our gold position if the stock made a new low. Our stop was hit and we’re out of the position.
That’s an example of playing a theme. If it doesn’t work, take your loss and get out. Could we continue to hold the position under the belief that gold will eventually rise? Sure we could. But I was wrong about gold. It hasn’t been acting like it should. So it was time to move on.
If gold firms up and its prospects look good, there are plenty of beaten-down gold positions we’ll get into to ride back up. But that isn’t happening, so why tie up capital?
We also bought a big drug manufacturer. The play there was to ride the coattails of a lot of big hedge funds that were taking massive positions and were agitating to get the company to sell itself for a nice fat premium. But that hasn’t happened, and the stock has slipped a little from where we bought it.
This is a different example of taking a position that may not pan out. So what if it doesn’t? We’ll get out with a small loss and jump on another trade, or put that capital to work in a fat dividend-yielding stock.
On this position, however, we didn’t just sell out and move on. We’re still in it, but I don’t want to own it if it keeps going down.
Bottom Line: Getting Out on Your Terms
Here’s how to exit a position when you don’t want to just pull the plug immediately.
We picked a spot where we wanted to get out with a loss that wouldn’t kill us but still gave us a chance to see if the company could be put into play to be sold. We have a stop-loss order down to sell out stock at that “we’re done” price.
In the meantime, if the stock starts to rise, which it has been slowly doing, we’ll raise our stop and lessen our loss as the position goes our way. If it turns into a winner, great. If it doesn’t and we get taken out, so what? It’s a small loss and was worth the risk based on what the reward might be.
That’s how you should get out of all your losers now.
If we rally higher from here, keep moving your stop-loss orders higher as the stock goes higher. Don’t stick your stop-loss order right under the stock – give it a little room to wiggle. You never know, maybe it will get back to breakeven or even turn into a winner.
But because it hasn’t happened so far, it’s not too likely it will turn out that way.
In the meantime, you’re cleaning house, getting rid of losers, and making way for winners.