Closing positions that don’t work for you is not only necessary but it’s mandatory. Here’s what I mean. Imagine you’re meticulously organizing your day to squeeze in that extra bit of productivity, but there’s a catch – your investment portfolio is acting more like a time sink than a growth engine.
It’s a common trap many fall into: holding onto stocks out of sheer optimism or inertia, even when every sign suggests it’s time to let go.
Identifying Underperforming Stocks
I know, I know, we all want to believe we’ve picked the next big winner. But what happens when, instead of soaring, our chosen stock barely hobbles along? It’s like keeping a plant that refuses to bloom, no matter how much you water it. And let’s be honest, no one has the time for that.
Why hold onto something that’s not moving? Well, I’ll tell you in the next part.
The Psychology Behind Holding On
It turns out, letting go is hard. We’re creatures of habit, after all. Acknowledging that a stock is underperforming feels a lot like admitting a mistake, and who loves doing that? But here’s the kicker – the market doesn’t care about your feelings. Ouch, right?
And what’s coming up next? A little insight into making the breakup with your stocks a tad easier.
When to Say Goodbye to Your Investments
Deciding when to part ways with an investment can feel like breaking up with a longtime friend. It’s tough, but sometimes, it’s for the best. And just like in any relationship, there are signs that it’s time to move on. But what are these signs? Let’s dive in.
Underperformance Compared to Benchmarks
First and foremost, if your investment has been consistently underperforming compared to its benchmarks or peers, it might be time to reconsider its place in your portfolio. It’s like being on a team where everyone else is scoring goals, and you’re still trying to figure out which way to kick the ball. Not fun, right?
And here’s the kicker: occasional underperformance is normal, but a prolonged period of lagging behind is a red flag. Why stick around in a losing game?
Changes in Fundamentals
Another crucial sign is changes in the company’s fundamentals. If the reasons you invested in the first place have changed or deteriorated, it’s a clear signal that the investment might not be as sound as it once was. This could be anything from a decline in revenue, profit margins, or even a change in leadership that doesn’t align with the company’s vision.
But wait, there’s more. What if the industry itself is facing a downturn? That’s right, it’s another reason to consider saying goodbye.
Making the Decision
Emotional Detachment
One of the hardest parts of investment is removing emotion from the equation. It’s easy to become attached to stocks that have done well in the past or come recommended by someone you trust. However, the past performance is not always indicative of future results, and investment decisions should be based on current and future potential, not nostalgia.
And how do you do that? By regularly reviewing your portfolio and assessing each investment’s performance and prospects without bias.
The Opportunity Cost
Remember, every dollar tied up in an underperforming investment is a dollar that could potentially be growing elsewhere. It’s the classic case of opportunity cost. By holding onto stagnating investments, you’re missing out on other opportunities that could be increasing your wealth.
Knowing when to let go of underperforming investments is crucial for maintaining a healthy, growth-oriented portfolio. Just like pruning a garden allows healthy plants to flourish, removing underperforming stocks can make room for more profitable opportunities. So, ask yourself, is it time to say goodbye to any of your investments? If the answer is yes, take a deep breath, and make the decision. Your future self will thank you.
What I usually do is that once I have held the stock for a month or so and it hasn’t done much I start thinking about getting rid of it. Or when I see a better opportunity and my money is tied up. In this case, the selling decision might come even quicker.
The Impact of Inaction on Your Portfolio
And here’s the thing – inaction is a decision too. By not making a move, you’re choosing to let your resources idle. Imagine what you could achieve if you redirected that energy (and investment) into something more fruitful.
Inaction, while seemingly safe, can be one of the most significant risks to your investment portfolio. It’s like sitting in a boat with a slow leak; if you don’t act, you’ll eventually find yourself sinking. And here’s why.
Opportunity Costs Are Real
Every moment you hold onto an underperforming asset, you’re saying no to potential growth opportunities. Think of it as choosing to stay home watching reruns instead of going out and experiencing something new. Sure, it’s comfortable, but what are you missing out on?
And here’s the thing: the market doesn’t wait for anyone. By not reallocating your assets or adjusting your strategy, you’re essentially standing still in a world that’s always on the move. Why stay stuck in the past when the future offers so much more?
Compounding Losses
Let’s talk about the snowball effect, but in reverse. Instead of growing wealth, inaction can compound losses. Imagine a small snowball rolling down a hill, gathering speed and size. Now, replace the snowball with losses, and you’ll see why inaction can be so detrimental.
But can it get worse? Unfortunately, yes. The longer you wait, the bigger the losses can become, making it harder to recover and reach your financial goals.
The Silent Thief: Inflation
Inflation is like a silent thief, sneaking up on your portfolio and eroding its value over time. By not actively managing your investments, you’re allowing inflation to diminish your purchasing power. It’s the financial equivalent of letting your car’s engine run without ever going anywhere; you’re just burning fuel (money) without making progress.
And here’s a thought: Inflation doesn’t take a break, so why should your investment strategy?
The Risk of Missing Out on Market Recoveries
Market downturns can be scary, prompting many to adopt a wait-and-see approach. However, history shows that markets recover over time, and the strongest rebounds often happen in the early stages of recovery. By remaining inactive, you risk missing out on significant gains that come with market recoveries.
Imagine missing the first few minutes of a comeback in a sports game. The best plays often happen right at the turnaround, and being on the sidelines means you miss out on the action.
Inaction might feel comfortable in the short term, but its long-term effects on your portfolio can be detrimental. Like a garden overrun with weeds, a neglected portfolio can’t thrive. By taking decisive action, regularly reviewing your investments, and staying attuned to the market, you can steer your portfolio toward your financial goals. Remember, in the world of investing, time is not just money—it’s potential. Don’t let inaction drain yours.
Coming up, let’s glance over the specifics and some key terms to keep you in the loop.
Details at a Glance
The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it. As you can see from the picture, the timing for buying was perfect! We all should aim for that.
Even though, even if you time perfectly, this doesn’t mean that you’ll get rich. The market will always do its thing.
Opening
- Underlying: APG
- Date: 1 Mar 2024
- Underlying Price: $36.09
- Stop Loss: $33.97
- Profit Target: $43.31
- Market Outlook: Confirmed uptrend
- RS Rating: 89
- RS line trend: U (Up)
- Industry Rank: 16 / 197
- Volume U/D Ratio: 1.5
- Institutional Ownership Trend: U (Up)
- Position risk, %: 5.82
- Position Risk to NL, %: 0.29
- Potential Profit (position), %: 19.82
- Risk to Reward Ratio: 0.29
- Position size, %: 4.97
- Why did I open this trade at that point?: “The stock broke out of the base with huge volume. The stock is under accumulation by the institutions.”
- Was it an ideal buy?: YES
- If it was, take a screenshot: N/A
- Remarks: The trend is older than 1 year. This could give slight additional risk.
Closing
- Date: 1 Apr 2024
- Price (close): $38.86
- Market Outlook: Confirmed uptrend
- RS Rating: 91
- RS Change: +2
- Remarks: “I closed the stock manually because it was down again and ate a chunk of my profits. I had held the position for a month, and it didn’t do pretty much anything. The trend of the stock is in its 3rd stage, which means that the price action is quite predictable. It looks like there is some distribution of the stock in the market.”
Results
- What went well?: “I still have the discipline to close the stock manually. It was an ideal buy. I bought at the strong up-day with huge volume.”
- Cause of Error / IMPROVE: The trend of the stock is in its 3rd stage, which means that the price action is quite predictable. It looks like there is some distribution of the stock in the market.
- Lessons Learned: Although profitable, the price action wasn’t very strong. Even though the stock was bought when it was breaking out of a base.
- Position ROI, %: 5.77
- Position ROI (portfolio), %: 0.29
- Position Open Time (trading days): 20
- Position Open Time (days): 31
And just when you thought you knew it all…
Terms and Definitions
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
Conclusion
So, why cling to those underperforming stocks? Letting them go isn’t about admitting defeat; it’s about making strategic moves towards a more prosperous future. Think of it as decluttering your investment closet – it might be tough to part with certain pieces, but oh, the space (and opportunities) you’ll open up!
And if you’re still wondering whether it’s time to let go of that one stock, ask yourself: is it sparking joy? Or is it just taking up space? Let’s make room for growth, not just hold onto hope.
