Common Portfolio Wisdom – PORTFOLIO DECLINES ARE JUST A PAPER LOSS IF NOT LIQUIDATED

Pros –

True on a tax basis.

Emotional selling is rarely good

Cons –

When the market recovers after a long-term decline, the investor has to make a larger % gain than the loss to get back to even (as opposed to growth capital from pre-decline levels).

Axiom – Guarding against large long-term loss is the most important component for growing wealth.

This Wall Street saying actually comes from reality in the world of taxes. If you bought a stock for $10 a share, and four years later it is worth $20 a share you have good news. You made money. If you sell the asset at this point you will have a gain to report on your taxes of $10 a share. You have “realized” your gain. You also have some bad news, a tax due on the gain. This is called a “capital gains tax,” which is a tax on the gain in the asset. You are only taxed if you sell the asset, thus you “realize” the gain only by selling the asset.”

If however, the share price went down to $5 a share, you have lost money in your investment, and if you sell, you will “realize” a loss. You can use that loss on your tax return to wipe out certain gains. You would not be able to use this to your advantage on your tax returns unless you sold. In reality, you haven’t lost until you sell, is only true when it comes to taxes. It is not true when it comes to investing.”

If you have $100 and lose 10%, what do you have? Right, $90, now say you make 10% on $90, what do you have? Right, $99, you have to make a greater gain to offset losses. This is only magnified by the percentage of the loss. For example, if you lose 30%, which is the average market loss during bear markets, you have to gain 43% just to get back to even.

There are no paper losses when it comes to investing. There is only lost money. Investors, can’t afford to be unrealistic in our outlook and most of all in our beliefs about money.

The truth is the market goes up and down. Your accounts may very well recover to their old levels, but until then, “you have what you have” is a better catchphrase to use. Reality is always a better place to begin when evaluating how to move forward. You can even say that you have lost money in your investments and if you keep them they may one day regain their value or they may not. Even if they do, you still experienced an opportunity loss.