Saying good-bye to a ‘forever’ stock

On the peculiar difficulty of letting go of a fund that had been intended to be held for the long-term

It is one of the most elemental investment principles: when a security, no matter how carefully selected, has disappointed, and looks set to continue to disappoint — sell it.

Simple to state, but hard indeed to follow, as I had cause to appreciate (again) when I finally let go of a holding the other day in which I had once placed high hopes.

Traders have less cause to be sentimental about these things than investors. Those who know what they are doing will have set stop-losses that prompt them to sell once their loss on an unsuccessful trade reaches a certain point, perhaps 10% or 15%. They will be prepared for a modest hit ratio: every third share in a portfolio might turn out a winner, maybe fewer. The cost of making money is losing money, as the saying goes.

It is harder for investors, who buy with the intention of holding for the long-term. Perhaps the troubled asset is a respected investment trust. Perhaps an ETF tracking a trend or sector. Perhaps even an index following a particular market (unusual, but consider Japan post-1990). Whatever, the fund was selected after careful research, in full expectation that periods of volatility would have to be weathered.

What, though, if a dry spell turns into a drought, with no obvious end in sight. The textbook thing to do is to hold, to wait it out, to recall the good reasons for buying in the first place. But market conditions can change. There are shocks to the system — pandemics, wars, banking crises — which can have a chilling effect lasting years, even decades.

It’s a tough judgement to make, but I come back to one fundamental question: is this asset still the best possible use of the money invested in it? Will it recover the losses it has made as effectively as every other security available on the market? If I am looking to make a gain of 50% over my investment horizon, and it is down 25%, will it make 75% to compensate? Is it more likely to do so than anything else I could be holding?

The answer is very probably no. Hard as it is, the time has come to look at the portfolio again with fresh eyes, as if the past had not happened. I may have a certain attachment to the security in which I have invested, but the money I have sunk into it is quite oblivious. It could probably be better employed elsewhere.

Probably — nothing is certain — but likely. Another useful thought: if conditions change again the security that has been sold can be purchased again, at whatever price it might have fallen to. I don’t need to hold on to it, suffering all of the losses on the way down.

After selling the asset I was invested in — in more ways than one — I hesitate to say that I felt good. But there was a certain sense of liberation. If I prove wrong and it does rally, there will be new regrets. But not blame. One can only do what one thinks is best at the time. Being rational does not mean that a choice made at a particular time, for particular reasons, will be successful. But it is irrational to persist with that choice if the evidence changes.

Image based on a photo by Braden Jarvis on Unsplash.