Don’t Marry Your Stock
Some people get attached to their stock. They fall in love with it when it performs well, and refuse to let it go when it becomes a loser. Don’t. There’s a rule in my office that reminds me to avoid this mistake: “I married my wife, but I only date my stocks.”
Like a bad relationship, there might come a time when dumping the stock is just the right choice, no matter how much you love it.
June was very special for my family. My wife’s parents, Ed and Marilyn Birt, celebrate their 50th wedding anniversary. With such extraordinarily high divorce rates in our society, I am very proud and honored to witness their commitment to one another through trials and joys of life.
In a marriage, you face the ups and downs together along the way, but in the investment world, you don’t have to hold on to your stock through thick and thin.
Interestingly enough, some people stick to their investments for sentimental reasons as if they were in a marriage. For years, I watch people become obsessed with owning stock from companies like General Motors (NYSE:GM), Eli Lilly (NYSE:LLY), or Caterpillar (NYSE:CAT). They have the stock for so long that it’s like family, or they have a strong love for the company, its executive team or the product. Sometimes, they inherited the stock, and treat it like Grandpa’s pocket watch – something to be put away in a drawer, treasured but taken for granted.
Reluctance to part with a stock is part of what’s called Prospect Theory, which holds that people fear losses more than they value gains. Developed by psychologist Daniel Kahneman, this explains why investors keep laggard stocks around for years, even when their inadequacy is obvious.
I understand people who feel the need for loyalty to a company, but the commitment was to the company, not the investment. For example, I used to own both a Harley Davidson (NYSE:HOG) motorcycle and the company stock. When the stock price showed weakness, we parted ways. I still have my bike and the good memories on it. Selling the stock doesn’t change its value to me. I remain a loyal customer for years.
Historically speaking, most stock prices have periods of rapid growth at different stages of business development. What you should do is to place your commitment in the right place and for the right reason.
Don’t get blinded by the love for a product or the company itself. If a stock has no more upside potential, you move on. And the best part of this relationship is that there’s no hard feeling about the breakup. You can always come back when things are sunnier.
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Written by Joseph “Big Joe” Clark, CFP, the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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