Your funds: breaking even is not an investment objective;  don’t focus on it |  Business news

Your funds: breaking even is not an investment objective; don’t focus on it | Business news

My friend Mark told me recently that he is thrilled that the recent market rally could bring him back to breakeven on a stock he wants to sell.

It’s one of the biggest stocks out there, a branded company that’s been in my portfolio for decades. Mark bought it last fall, enjoyed a gain of around 20% in the first three months he held it, and then saw that gain and more disappear as the stock market plummeted during the first half of 2022. .

“I’ve waited too long to sell it downhill,” explained Mark, “but if he can recover a little from here, I’ll break even and then I’ll give up. I think I can do better.”

Mark can do better, okay. And that has nothing to do with the specific company, and it has everything to do with the way he thinks, and the idea that “breaking even” is some kind of investment goal.

People are also reading …

While no investor wants to lose money, the price at which you bought a stock may be the least important data point an investor can consider as they analyze what to do next.

With the market’s first half decline and recent rebound, coupled with sticky high inflation rates and enough socioeconomic concerns around the world to make anyone nervous, many investors are looking at how they could change and alter their holdings now, if this it means cutting and rebalancing positions or making wholesale exchanges of stocks and funds that they will forego as they rotate into positions that better suit their current mindset. This makes this a time when many investors will make mistakes.

Individual investors have a long history of making inappropriate moves, even just easy ones. They tend to buy when something is good and sell when it cools, which means they buy high and sell low.

There is a lot of research showing that investments perform better than investors themselves, which means that individuals rarely get the most out of the securities they buy; Morningstar Inc.’s most recent “Mind the Gap” study – designed to measure investor returns relative to mutual funds and ETFs they own – found that poor timing to buy and sell has left the average investor lagging behind by about 1.7 percentage points per year.

You can safely assume, therefore, that doing less with your wallet is often more profitable than making more moves and changes. That’s why it’s important not to take anything extraneous or irrelevant into account in your decisions. Your break-even point is a red herring, something that is taking your attention away from what really matters.

In Mark’s case, once he thought he could “do better” and gave up the title, there was no point in waiting for a return to balance. 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 holding on to something that, according to his own calculations, was making him worse than what he would have owned later. having earned the change. All to avoid the pain of saying “I suffered a loss”.

Clinical psychologist Stanley Teitelbaum, author of 2021’s “Smart Money: A Psychologist’s Guide to Overcoming Self-Defeating Patterns in Stock Market Investing”, calls it “get-even-itis.”

“The human instinct is not to suffer losses,” Teitelbaum said last week in an interview with “Money Life with Chuck Jaffe”. ‚ÄúResearch studies have shown that taking a loss is two and a half times more painful than experiencing the joy of winning from a game, so people are reluctant to take a loss and therefore continue with card losses. … Get-even-itis is a chronic disease in which people delude themselves into maintaining a losing situation and not being able to bear a loss at a reasonable level. “

Waiting for a return to balance is a form of bargaining, in which people allow themselves to accept something difficult feeling as if the choice they are making minimizes the trauma.

Ultimately, investors must recognize that the share price is a tool for measuring market value, but not in itself a means of fully assessing the value of a company. Prices move for many reasons, and none of them have anything to do with your original price point, the high point you reached while holding the stock or the trigger point of such great pain that you will also sell at a loss.

In Mark’s case, for example, many investors believe the brand stock he prepares to sell is a better deal now than when he bought it in 2021, because the drop in price has lowered its price-to-earnings ratio.

Instead of considering whether the stock is a better buy now, trading for 30x more earnings than when he bought it about 40 times a year ago, Mark is selling because he will be back to square one.

Break-even numbers and spikes are interesting points along the way, but they’re not real reasons to hold out or sell. If the only thing you know about a stock or fund is its price, you don’t have enough information to make a correct decision.

Whatever move or decision you make, there should be solid justifications behind it. You could sell when something overheats, blocking gains and reinvesting in stocks that seem undervalued. You could buy when a stock falls like a stone, thinking it has become a bargain.

The more you know about safety, the more you can put into your decisions and choose whether to run with the tide or against it. But your break-even point isn’t a factor. It is not a measure of investment, it simply reflects your timing.

Don’t confuse having a number stuck in your head with a number that is “significant”. Manage your portfolio based on your goals, investment objectives and risk tolerances and, over time, spikes, lows and break-even numbers will take care of themselves.

Leave a Comment

Your email address will not be published.