So, I had an interesting chat with a friend over the weekend. He’s been investing for a long time, but due to lockdown I’ve not seen him since I started investing.
I explained that I had quite a few positions that I got into when I first started investing, but hadn’t really done any DD into the companies, and now wasn’t sure that they were sensible choices to hold long term after seeing what happened to them in the mini-crash. But I hadn’t sold them, because they’d lost money and I was “buying the dip” to try to bring the average price down in the hope I could break even before selling them.
One thing he explained me is that it doesn’t really matter at all what price you bought at, if you think it’s overvalued you should sell, whether it’s at a profit or a loss because something changed in the fundamentals. He also said that one of the best things you can learn is how to take a loss without regret, basically learning how to avoid the sunk cost fallacy. He also said that it’s worth being prepared to always take a stop-loss sell on a new position at something like 10% loss, but being happy to accept that it’s OK to take that loss to avoid a bigger loss later on.
Today, I sold off almost all of the shares I thought were overvalued. In all, about a third of the stocks and 16% of the value of the portfolio, and I took an average loss of about 1.5% on those shares (so lost about 0.2% of my portfolio value) by selling them (some were positive - I sold one that was up by 10% and overvalued, but most were at a smallish loss or just over breakeven). And actually, while I’ve lost some money by doing it, it’s amazing how much worry has gone as a result. Just knowing that the stocks I have left are ones I’m actually interested in, and are the one I think will do well after a market crash if it happens, is well worth that small hit.
Obviously, it helped that stocks overall bounced back a lot, so my gains for the day were about 5 times the losses I crystallised, so I guess it was a good time psychologically to do it.
So anyway, I don’t want to give anyone financial advice because this might not be right for you, but just thought I’d share the story about how it might be better to take a small loss now for piece of mind that you’re not committing yourself to sticking with risky stocks during a crash. I’ve still got a lot to learn, but I definitely feel happier now with my more streamlined portfolio.