"If you liked it at $20/share, you'll love it at $8/share."
"The stock price is low; it's time to double-down."
"Don't worry. The market always comes back."
"It's only a paper loss."
These investment euphemisms may sound all too familiar to you, especially when you've lost a good sum of money. While there may be rare instances where it makes sense to add money to an investment that has lost value, many times the statements above are thinly disguised excuses for a huge underlying problem. The biggest brokers and advisers peddle these seemingly reasonable excuses. And if you've ever uttered these phrases, they've convinced YOU to drink the Kool-Aid.
Life, like investing, involves some level of risk, and at some point you have to expect to lose. It's how you manage these losses that separates you from the real pros that post the biggest returns. Admittedly, the hardest thing to do in investing is taking a loss on purpose.
When you get to the heart of the matter, the commonly espoused statements I led this column with are really just excuses for not having a sound exit strategy. MF Global's collapse could very well be due to fraud, but the firm's bankruptcy was also attributable to Jon Corzine's lack of an exit strategy as he let the losses on his significant euro debt holdings (est. $7 billion) get away from him.
One of the best pieces of advice I can offer you is to cut your losses short and let your profits run.
In other words, manage risk by knowing how much you're willing to lose in an investment, and when that price is breached, get out. You have to know when to hold 'em and know when to fold 'em.
I know that some of you will say "what a great article, Rob's right," but inevitably we are creatures of habit and you'll tend to revert back to your old habit of holding onto your losers way too long because you want to get back to even--which really means that you want to be right. Personally, I couldn't care less about being right; I'm more focused on protecting and creating wealth.
One of the greatest traders of our time, Ed Seykota, once said: "Everybody gets what they want out of the market." In essence, what he's referring to is that if you don't have a disciplined exit strategy, then you are going to get exactly what you want out of the market: uncontrollable losses.
I've personally seen many a money manager hold stocks with unrealized losses in the 30-80 percent range, and it was all due to a lack of an exit plan. Look, we can't control growth, but we can control how much we risk and then draw a line in the sand. So, next time you're meeting with the person who manages your money, ask him or her what the exit strategy is. If he or she can't clearly communicate a disciplined, concrete approach, don't worry, it's only a paper loss.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.
Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.
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