My friend Mark told me last week that he was delighted that the recent rally in the market could bring him back to breakeven on a stock he wanted to sell.
It is one of the most important stocks in the market, a hallmark company that has been in my portfolio for decades. Mark bought it last fall, made about a 20% gain in the first three months he held it, then watched that gain and more disappear as the stock market crashed in the during the first half of 2022.
“I’ve waited too long to sell it on the way down,” Mark explained, “but if it can pick up a bit from here, I’ll come back to break even, and then I’ll give up. I think I can do better. “
Mark can do better, okay. And it has nothing to do with the specific company, and everything to do with their way of thinking, and the idea that “break even” is some sort of investment goal.
While no investor wants to lose money, the price at which you bought a security may be the least important data point investors can consider when analyzing what to do next.
With the market’s decline in the first half and recent rebound – coupled with high, sticky inflation rates and enough socio-economic concerns around the world to make anyone nervous – many investors are wondering how they could alter their holdings now, whether that means cutting and rebalancing positions or making wholesale swaps of stocks and funds that they will drop as they rotate into positions that better suit their current mindset .
This makes it a time when many investors will make mistakes.
Individual investors have a long history of inopportune moves, even the easy ones.
They tend to buy when something has been going well and sell when things calm down, which means they are buying high and selling low.
Plenty of research shows that investments outperform investors themselves, which means individuals rarely get the most out of the securities they buy; Morningstar Inc.’s most recent “Mind the Gap” study – designed to measure investors’ performance relative to the mutual funds and ETFs they own – found that poor timing for buying and selling left the average investor lags about 1.7 percentage points per year.
So you can safely assume that doing less with your portfolio is often more profitable than making more moves and changes.
This is why it is particularly important not to factor anything into your decisions.
Your break-even point is a red herring, something that distracts you from what really matters.
In Mark’s case, once he thought he could “do better” and gave up on the action, there was no point in waiting for a return to equilibrium. In addition to taking the tax advantages that come with a loss in a taxable account — where the loss can be used to offset other gains — he was clinging to something that, by his own calculations, made him worse than he was. he would own after making the change.
All this to avoid the pain of saying “I have suffered a loss”.
Clinical Psychologist Stanley Teitelbaum, 2021 author Smart Money: A Psychologist’s Guide to Overcoming Self-Destructing Patterns in Stock Market Investing, calls it “get-even-itis”.
“The human instinct is not to suffer loss,” Teitelbaum said this week in an interview on The Money Life with Chuck Jaffe. “Studies have shown that it is up to two and a half times more painful to suffer a loss than to feel the joy of winning at a game, so people are reluctant to suffer a loss and therefore continue with paper losses …Get-even-itis is a chronic disease in which people trick themselves into clinging to a losing situation and not being able to bear a loss at a reasonable level.
Waiting for equilibrium to return is a form of negotiation, where people allow themselves to accept something difficult, feeling that the choice they are making minimizes the trauma.
Ultimately, investors should recognize that stock price is a tool for measuring market value, but not in itself a means of fully assessing a company’s value.
Prices move for many reasons, and none of them have to do with your original price, the high point you hit while you owned the stock, or the trigger point of a pain so great you’ll sell. even at a loss.
In Mark’s case, for example, many investors believe the branded stock he is about to sell is a better deal now than it was when he bought it in 2021, because the drop in price lowered its price-earnings ratio.
Rather than question whether the stock is a better buy, now trading at 30x earnings than it was when he bought it at around 40x a year ago, Mark is selling because it will be back to where it started.
Breakevens and spikes are interesting points along the way, but they’re not real reasons to hold on or sell.
If the only thing you know about a stock or fund is its price, you don’t have enough information to make an informed decision.
Whatever move or decision you make, there should be strong justifications behind it. You can sell when something gets hot, lock in the gains, and reinvest in stocks that look undervalued. You might buy when a stock drops like a rock, thinking it’s become a bargain.
The more you know about safety, the more you can put into your decisions and choose to go with the flow or against it.
But your break-even point is not a factor. It is not a measure of investment, but rather a reflection of your timing.
Don’t confuse having a number stuck in your head with that number being “meaningful”.
Manage your portfolio according to your goals, investment objectives, and risk tolerance, and over time the peaks, troughs, and breakevens will take care of themselves.