They say losses have three times the emotional impact of gains and because of that, most investors find it three times harder to take a loss than they do to take a gain - the complete opposite to the traders' mantra: "Take your losses quickly and let your profits run."
If the market goes down again, here is a series of arguments designed to persuade you to sell. If you're ever having trouble taking a loss, are caught in the headlights, are getting emotional, and the offending stock is still in your possession, read this list. You will have put the sell order on before you get to the end.
If a stock is going down, it is far more likely to continue going down than it is to turn on a sixpence to suit you.
The further a stock falls, the more intense the selling becomes as higher losses cause more selling decisions, so sell early: an early loss is the smallest loss.
If you sell 10 falling stocks, as any technical trader will tell you, it will be the right thing to do in nine cases, but you will only remember the other one.
If you sell now, you are no longer exposed and the pressure disappears. All you have to do is come to terms with the loss.
If you sell now, you can always buy it back and, who knows, you might buy it back for less than you sold it.
If you sell now, you enter the eye of the storm. All becomes calm. You can watch from a distance and think. You can always choose to enter the storm again, and if you do, you will be thinking more clearly and be armed with a plan.
If you are making a loss on a stock, think to yourself, "If I had cash, would I buy this stock now at this price?" No? Then why are you holding it? Sell it. (Most people begin to irrationally "hate" the stocks they lose money on, so this argument always works.)
Your state of mind has value. What would your spouse (or you) pay to have a carefree you on the weekends, instead of one who's ripping the kids' heads off? Look after yourself, there are not that many weekends in the year - or your life. Don't ruin too many of them by keeping risky loss-making positions until Monday because you didn't have the guts to sell them on Friday.
Averaging down is a mug's game. If you have money to invest, you should be putting it in the best investment in the whole world. Do you really think that is going to be the very same stock you have already bought at a higher price and that's falling at the moment? Very, very unlikely. You already have an exposure as well, why do you need more of something that has already proved itself to be a dog? Do you really want to turn a short-term trade into a long-term loss? Every day you see it in your portfolio and every day it will be flashing "You idiot". There is value in avoiding that.
The quickest way to become a long-term investor is to make a short-term trade and get it wrong.
There is no logic in being emotional about losses. Create an Excel spreadsheet to monitor the total worth of all your shares using live prices. Up $500 down $500. This figure is the only truth. This is what the shares are worth. What you paid for the shares is irrelevant, so why care about whether it is a profit or a loss? It is an amount of money. If it's gone, it's gone. What you paid has no bearing on the next price.
Most clients who have loss-making stocks will tell you they "hate XYZ". So why hold it? Far better to put the cash into something you want to wake up to in the morning than something that depresses you. If in doubt, sell it - it will crystallise a capital loss and you can always buy it back.
Hopefully you'll never make a loss, but when you do, read this again and see if you can get to the bottom before you've put that sell order on.
Frequently Asked Questions about this Article…
Why do losses feel worse than gains and how does loss aversion affect my investing?
The article explains that losses carry about three times the emotional impact of gains, so most investors find it much harder to take a loss. That bias can cause you to hold losing positions too long instead of following the traders' mantra to take losses quickly and let profits run.
When should I sell a losing stock to limit losses?
Sell early. The piece argues that a falling stock is more likely to keep falling, and the earlier you act the smaller your loss will be. Practical rules from the article: if you wouldn't buy the stock now with cash at the current price, sell it; selling removes exposure and emotional pressure; you can always buy it back later if it falls further.
Is averaging down (buying more of a losing stock) a smart investing strategy?
No. The article calls averaging down a 'mug's game.' If you have new money to invest, you should put it into the best opportunity available, not into a stock that has already fallen and proved risky. Adding to a loser can turn a short-term trade into a long-term loss.
How can I avoid making emotional trading decisions when a stock drops?
Use simple, objective rules: ask yourself 'If I had cash, would I buy this stock at this price?' Monitor the total worth of your holdings with a live-price spreadsheet so you focus on current value, not purchase price. Selling to enter the 'eye of the storm' can also remove pressure and help you think clearly with a plan.
What role does my state of mind and personal life play in deciding whether to keep a losing investment?
Your mental health has value. The article stresses not letting risky, loss-making positions ruin weekends or family life. If a stock is causing stress or you 'hate' it, it may be better to sell, crystallise the loss and invest the cash in something you feel positive about.
If I sell a bunch of falling stocks, will I be proven right or wrong?
Selling falling stocks is often the right move: the article notes that if you sell 10 falling stocks, nine times you’ll be right, but you'll tend to remember the one that rebounds. Accepting that you won’t be perfect helps avoid clinging to losers out of regret or selective memory.
Can making a short-term trading mistake actually help me become a better long-term investor?
Yes. The article suggests the quickest way to become a long-term investor is to make a short-term trade and get it wrong. Learning from the mistake—by cutting losses early and using objective rules—can shift you toward a more disciplined, long-term approach.
How should I measure the value of my portfolio: purchase price or current market value?
Focus on current market value. The article recommends tracking the total worth of your shares using live prices (for example, an Excel spreadsheet) because what you paid is irrelevant to future price moves. Up $500 / down $500 is the only truth for decision-making.
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