Tips For Dealing With Losing Stocks

When designing a long-term stock portfolio, many people focus on stocks earning lucrative returns while neglecting the presence of losing stocks in their portfolio. Are you torn between keeping the losing investments and selling them as soon as possible? Here’s what you need to do to make the best of your portfolio in the long run.

Defining Losing Stocks
You may have a few stocks in your portfolio that are down 5 per cent, 7 per cent, 10 per cent, 15 per cent, 30 per cent, 50 per cent, or even more. It does not, however, mean that all of these are losing stocks. So, who are the losers? Losing stocks are ones in which the stock price has dropped significantly and you cannot recoup even 20 per cent to 30 per cent of your initial investment. Such failing stocks continue to perform terribly, and you lose money in the stock market as a result.

Tips to Reduce Losses in Stock Market

• As part of your investment strategy, maintain your stop loss discipline.
• Excessive trading does not result in increased profits. So, don’t overdo it.
• Determine your risk tolerance and invest in stocks accordingly. Avoid investing in Small-Cap companies if you are a risk-averse investor.
• Never maintain a losing stock for a prolonged period of time, since this will not only exacerbate the loss but will also prevent you from investing elsewhere.
• Avoid bottom fishing since it is difficult to foresee market peaks and bottoms
   

Types of Losses
Losing money is an unavoidable element of investing in the stock market. However, there are other types of losses that can occur while investing in the stock market. These losses are discussed in the forthcoming paragraphs.

Loss of Capital — This is the most basic, yet most terrible, type of loss. You buy a stock and then watch it falling and stay there. You eventually decide to end the agony and sell it. Because you lost money when you sold the stock for less than you paid for it, this is known as a capital loss. You may, however, utilise this to shield your winning trades from taxes. Our Income Tax Act contains a provision that allows capital losses to be offset against capital gains. The short-term capital gains tax on equity is 15 per cent, whereas the long-term capital gains tax is 10 per cent with an exemption of ₹1 lakh.

Opportunity Loss — This is another form of loss that, while less agonising at first, is nonetheless very real. Typically, this causes investors to feel remorse. Assume you put ₹10,000 into a hot growth stock. After a year of ups and downs, the stock is presently pretty near to what you paid for it. You take it with a smile, adding, “Well, at least I didn’t lose anything.” But that is not the case. You put aside ₹10,000 for a year and got nothing in return. Even if you had invested in bank fixed deposits, you would have received some return during the same year. This is referred to as an opportunity cost or loss. When a stock fails to perform or fails to outperform the lower risk return of a bond, you have lost an opportunity. It’s essentially a trade-off that cost you the other option

Missed Profit Loss — This sort of loss occurs when you watch a stock make a huge run-up and then fall down, which is common with more volatile stocks. Few people can correctly predict the peak or bottom of a market or an individual stock. You may believe that if you had just sold at the peak, you would have made more money. Many investors wait for the stock to rebound and reclaim its peak, but that may never happen. Some investors may be tempted to reinvest if it does, expecting for even more returns, only to see the stock fall again. The easiest way to avoid this sort of loss is to plan an exit strategy and be content with a respectable profit.

Paper Loss — Some argue that if I don’t sell, I haven’t lost anything or that my loss is merely a paper loss. While it’s merely a loss on paper and not in your pocket, the fact is that you need determine what to do if your stock investment has taken a significant knock. If you feel the company’s long-term prospects are still solid and you are a value investor, this could be a good time to add to your holdings. If the stock continues to underperform, your paper loss will turn into an opportunity loss.

Managing Losing Stocks When you examine investment behaviour, you will see that the agony of a loss is far higher than the happiness of a profit. As a result, when we suffer a financial loss, we often persuade ourselves that the asset will rebound and we will at least breakeven. Keep reading to find out how long you should keep a losing investment.

•  Keep the stocks you think are truly good and sell the losers, regardless of their historical performance.
•  When determining what to do with a losing stock in your portfolio, the cost price is meaningless.
•  Sell the losing stock if you feel it is technically or fundamentally weak. There are most likely better ways to invest your money.
•  If you feel you made a mistake by investing in a certain stock, it is better to accept the loss now rather than later.

Avoiding Losses Not taking any risk is the biggest risk in the stock market. In order to succeed in the stock market, one must enter the marketwith discipline and intellectual forethought. Keep the following pointers in mind:

 Review the Portfolio — It is a good idea to examine your investment portfolio on a regular basis to verify that it is on track. Due to their inability to time their entry and exit points, individual investors underperform the market.

Rebalance the Portfolio — A portfolio must be rebalanced by periodically reallocating assets to a preset composition and assessing the allocation at least once a year. By withdrawing profits from high-performing sectors and reinvesting them in fundamentally sound companies with revised lower values, rebalancing enables investors to sell high and buy cheap

Exercise Accountability — If you have experienced a loss, you must recognise that your call was incorrect. Being responsible for your losses is said to be the first step toward regaining control of your finances.

Time the Exit — Investors must recognise that the share price of a business may climb after they quit their stake as no one can forecast exiting at the highest price. Limiting a sector’s exposure is typically a good idea when interest in it reaches its peak. While there is no single answer to the question of when is the ideal time to sell, investors should consider a few elements to tip the scales in their favour.

Examine the Options — Look over your alternatives to determine if there was anything you could have done to make things better. In contrast to those who reverse their trade during a bull market and not only make up for losses but also move closer to gains, some traders and even investors wait for a better chance.

Redefine Investment Objectives — Prior to choosing the stocks you wish to invest in, decide what level of risk you can tolerate. You won’t have to scurry for finances when you link your assets to your objectives.

Define an Investment Strategy — An investing strategy guides you through your financial path. If domestic and international unrest disrupts your assets on a macro level, it will help you get back on track

Keep Yourself Motivated —Make your loss an opportunity to learn and enhance your skills. This will assist you in reducing future losses and increasing investment efficiency

"Let your winners run and cut your losers. It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds." 
– Peter Lynch
Successful American Investor, Mutual Fund Manager And Philanthropist

Conclusion
Because no one wants to lose money in the stock market, investors are stressed by the prospect of owning losing stocks in their portfolio. Return to trading in the stock market once you have overcome the pain and financial losses. However, you may trim losses to get rid of losers at the right moment while retaining the winners