Over the years I’ve been asked this question a lot: “What do I do? Should I sell now?”
This is often accompanied by a story about how the person bought a stock or asset and it went down in price instead of up. The blame usually goes to a financial advisor or local friend who gave them “the tip.”
But we see it like this: They entered into the position without a plan and now they don’t know what to do with their unrealized losses.
I have a simple way to address this situation. Presuming that the asset in question is liquid, like stocks or ETFs, or even crypto, the question to ask yourself is this:
“Hypothetically, if all the money I have in this investment was in cash, and I could do anything I wanted with that cash, would my decision today be to buy that asset?”
If the answer is “yes,” then you have your answer. But usually that answer is “no,” which is why you’re asking me in the first place.
Transaction costs these days are next to nothing. So, if you don’t have to be in, or don’t want to be in, something, there’s no reason to be in it.
The answer to your question of whether or not you should sell seems obvious. Yes, get the hell out.
But this brings up a bigger discussion about having a plan.
If you don’t invest with a plan, then you’re likely to find yourself in this predicament quite often. It’s a problem, because now you’re letting your emotions control your decision making.
The only way to avoid putting yourself in this lose/lose situation is to predetermine what you’re going to do before you enter into the position.
Whenever we make an investment, we first want to decide where we’re wrong. If we’re buying a stock, for example, there has to be a price between where we buy it and zero where we decide that it was a bad decision. This is the key to risk-management, which I preach during each and every trade I recommend in Breakout Profits.
That level can be determined using prior price support, Fibonacci analysis, momentum, relative strength or whatever strategy you incorporate in your process. It’s less about howyou specifically make this-risk management decision and more about actually making a risk-management decision.
In addition, we also want to decide at what point we will be taking profits. In other words, where are we right?
Are we taking half off the table at a specific price? Where are we taking the rest off?
Before entering into a position, we want to predetermine where we’re right and where we’re wrong. That’s the only possible way to calculate the risk versus reward proposition in question.
And if you can’t determine the risk versus reward, how can you possibly decide whether the risk versus reward meets your investment objectives?
Our emotions take over our decision making when our stress levels are elevated. That’s human nature. And when are our stress levels the most elevated, at this point in human evolution? When money is involved.
Our goal should be to avoid, at all costs, letting our emotions control our decisions. I think we need to eliminate these evolutionary flaws from the process if we want to stand any chance of being profitable.
So, if you’re sitting around wondering whether you should be selling your position(s) — stocks, crypto, whatever, here’s what I would say to you:
- Let this be a lesson and don’t put yourself in this position ever again. Predetermine where you’re right and where you’re wrong before you get involved in the first place.
- If the money you have in the investment(s) was hypothetically in cash and you could do anything you wanted with that money, is buying the position(s) in question what you would do with that cash today?
The goal is to not put yourself in this lose/lose situation.
But if you’re already in it, learn from this mistake, and ask yourself if you would buy it today if you were sitting in cash instead. That should make your decision easy.
Thanksgiving was last week, so obviously I got this question a lot regarding both stocks and crypto. My response was what you see here above.
Here’s to putting together a plan and sticking to it.
To wise investing,