How to know when to Cut your Investing Losses

Investing, whether in stocks, real estate, or something else, creates the possibility of wealth.  However, sometimes we get so caught up in the glamor and glitz of an investment that we put common sense aside and stay with an investment even though it continues to decrease in value.  Like a captain staying with a sinking ship, sometimes we just cannot let go.  Unfortunately, by the time we realize what we are doing, chances are that the damage has already been done, and our investment in practically worthless.

Knowing when to get out of an investment is just as important as knowing when to get into an investment.  Before you buy one share of stock in company or before you purchase a piece of property, you should set a sale price for loss based upon you risk tolerance and investment strategy.  Keep in mind that stocks will be much easier and faster to sell than real estate.  As such, plan accordingly with real estate and know that you may have to take a bigger loss to sell quickly.

The sale price for losses can be either a dollar amount or a percentage.  For example, you may decide that if your stock investment losses $500 in value, you will sell it.  Alternatively, you may decide that in order to sell, your stock investment must lose 5% of its value.  These same options exist for real estate.

Once you have set a maximum loss amount, put things in place to ensure that you will actually sell the investment when your loss price is reached.  For example, with stock you can have a stop loss order.  This order will automatically sell your stock at a set price or percentage decrease.  You cannot do the same with real estate.  However, you can obtain a real estate agent and talk about your options once the maximum loss amount is reached.

You must overcome the urge to stick with the investment in hopes that it will turn around.  Many investors have lost a fortune using the same flawed logic.  Remember, past performance is not an indication of future success.  As such, if your investment is decreasing in value, sell and cut your losses. 

There may come a time when you sell at a loss and your prior investment does in fact make a turn around and returns to profitability.  You cannot dwell on this circumstance.  This is a rare event and in the long run, you will save far more money by sticking with your maximum loss sales price than you will make by hanging on to a losing investment and hoping for a turn around.

Remember, set a maximum loss price based upon your risk tolerance and investment strategy.  Put things in place to ensure that you follow through with a sale should your investment decrease in value.  Finally, do not get fixated on the idea that your investment may come back or make a turn around.  If you do, you will end up losing far more money than you have to.