Is there any joy of cutting your losses? You may be surprised, the answer could be both yes and no!
No one will be happy when you accept a losing investment position as final decision. Most investors refuse to turn a paper loss into a realized lost in reality. They will hold on steadfastly with a faint hope that market will turn up to a breakeven point for their advantage, and then they are willing to exit. This can happen some of the time. When this happens, they will change their mind, not exiting but to continue their position.
Peril of Buy and Hold Strategy
If this event becomes the norm to their investment experiences, this buy and hold principle becomes their investment strategy. The more they succeed, the more crystalized in their investment philosophy it becomes. This buy and hold investment strategy becoming more and more dangerous particularly for those who came into this investment business less than a decade. Many of us with buy and hold strategy could have profited with fat income now. But they have not experienced the vanity that all the years of profit we cumulated can be wiped out in the next major market correction if we hold on with such faint hope without cutting loss in place.
For Fund investors, cutting loss is the least practice or least advised ever. Because all professional advice convinces investors that they should trust fund managers to do their jobs. They will help to manage your investment through stormy days and come out unharmed eventually.
This might be true when you still have a long horizon, say more than 7 years before you end your investment plan. However, if you are left with only a short period of time, like 2-3 years and you are going to need that invested fund, the best advice could be that you better redeem your fund now. Because we all sensibly know that we are getting nearer to the end of our current economic cycle. But the fear comes in “what if” market charge up after you exited the market especially if you have invested with US market funds?
Both fundamentalists and Chartists tell us that US markets have much more room to shot up. Not only cutting loses will have their moment of regret, taking profit too early will also have their set of regret. This is where market timing myth grips investors and often causes indecisiveness and deeper losses.
Cut Loss in Wrong Timing
Cutting losses in wrong timing have also caused many investors feel that cut loss strategy is not workable. Investors who have cut loss at the worst timing where rebound immediately happen after investors exited the market would feel reluctant to employ cut loss on the next market fall. Losses are maximized in this case. This can be the worst experience any investors might have had.
Therefore, over the years with experience about the market, I would advise fund investors to do the exact opposite~ reverse psychology. Instead of cut loss while market plunges, we should top down instead to average down entry prices. But cut loss later only when market recovers or back up again. As what Warren Buffet has advised investors to be fearful when everyone is greedy, but greedy when everyone is fearful. Exit market when market trend is shooting uphill and add more capital when market plunges.
Implementing cut loss will not be any joyful moment. But on the other hand, without cutting losses, the continuous market fall can be sleepless too. Unless behaving like a foolish ostrich by burying his head under the sand, he will have restless days ahead. Because no one really knows how deep the bottom will be.
For example, if anyone has exited emerging market by cutting losses on June 2018 will find it joyful now because the emerging market has gone much lower and it will possibly have much more room to drop when Trump said he has not yet finished trade war with China. Even after the 200 billion tariff waiting to implement anytime, there’s still another 267 billion coming on its way against China.
Joy in Cutting Losses
For the gold related funds, we have come to realize there will be still much more room to drop because 2 more interest rate hikes this year are on their ways as recent robust job report has flared up Fed decision. Interest rate hike will strengthen the value of the dollar. As US dollar rises, gold index travels opposite direction. As gold has dropped recently but rebounded to regain its lost ground of 1,200 level now, would it be a better position to cut loss now rather than later? Could it be that the recent drop served as a good sign of warning for all of us who are gold players and the decent rebound has given us an excellent chance of escape?
Cutting losses will not be pleasant for any investor. However, without cutting losses will also not be positive neither after seeing your positions dropping further into the negative territory. On the other hand, when cutting loss is done in a correct way, it can be a rewarding experience after market dropped deeper. Only there and then we find it joyful and fortunate that we have exited the market prudently and decisively.
Cut loss is a strategic way to preserve our capital from further shrinking. Any amount of loss can be recovered if we do not lose hope on the market future. When the storms and rains are all over, market bottoms will be showing up. There and then a new hope and beginning of blissful investing future is there waiting for us to take.
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to make up individual investment decision.