What to do if theres a Loss

To paraphrase the great American philosopher Forrest Gump, “Losses Happen.” If you invest money in anything other than insured bank accounts, you risk loosing he principal balance. Of course, bank accounts aren’t going to earn a rate of return much above the inflation rate, so a long term investor must look to more risky ventures to make a profit.

But when an investment crashes and looses value, when do you pull the plug and get out what money you have left? That question is not easy to answer and depends on many factors.

If you have a need for the money in the investment for another purpose, you may very well decide that you’ve lost enough and cannot incur any further looses with the investment. For example, if you had money in a conservative bond mutual fund to pay for your child’s education, you may decide your tolerance for risk and further loss is not so great. It’s better to take a small loss than to risk loosing even more money that you are relying on for an immediate need.

Another reason to cut your losses would be a lack of faith that the investment is going to recover. Let’s say you invested in your uncle’s llama farm a risky venture in the best of circumstances. Then one day you wake up and all the llamas have come down with a rare fungal disease. It’s reasonable to assume that you aren’t going to be making much profit off these llamas, especially after you account for all the veterinary bills. Better to sell the llamas at a loss to someone who is willing to deal with the problem and move on to something that may be more profitable for you.

It may be a good idea to take a loss if you have a better place to invest your money which will not only stop the losses of the first, but possibly even recover some of those losses. Using our previous example, it may be a good idea to sell the llama farm, even if you have faith that they will recover, if you find out about an investment in undersea coral farming which is sure to be a safe venture for your money. Switching investment strategies is always a legitimate reason to take a loss, just be sure that your new investment is more likely to make a profit than the previous one.

Sometimes it pays to be patient with a poorly performing investment. People who got out of the stock market immediately following the dot com crash of the early 2000’s lost a LOT of money. Many of those who stuck with their investments got much of that value back over the next couple years. The market recovered. Likewise, it’s always possible that the llamas could recover and go on to make you money in whatever fashion llamas do such a thing.

There is no easy answer to knowing when to take a loss on an investment. Each person must make that decision on their own, taking in to account many different factors. Before you panic, make sure you give a good deal of thought to what the implications of your loss may be. Good luck!