Recently I heard three different people repeat the old saying, it’s only a “paper loss.” Meaning: If you haven’t sold a security and “locked in” your loss, it’s not really a loss. One of the three people I heard say something like this was a TV person, interviewing the financial journalist Maria Bartiromo.
What is the difference between a loss on a security you still own shares of—and a loss on a security you have unloaded? Is it a “distinction without a difference”? Like the distinction between “an unmarried man” and “a bachelor”?
Truth to tell, there isn’t much of a difference. The difference, so to speak, is paper-thin.
After all, if you were once worth $1,000,000 and you now have a “paper” loss of $400,000, you’re worth only $600,000 —whether you’ve sold or not. Try actually selling your losing securities for more than their market value, and reality will quickly set in.
But the door is not entirely closed. You still own the security. So, if it goes up, your loss will shrink. And if it goes down, your loss will balloon.
It’s hard to think of a good analogy. A disease has not been cured; it is only in remission? There are at least two benefits to believing that a paper loss is markedly different from a real loss.
1.You’re a happier person. (OK, so maybe you’re the “happy moron” that Dorothy Parker wrote about.*)
2.You may hold onto your losers instead of selling them -- and thus maintain your (presumably reasonable) exposure to the stock market. Besides, stocks usually go up, don’t they? And stocks that go down a lot tend to bounce back, don’t they?
But there are also undeniable drawbacks to holding onto losing securities:
1. If you mindlessly cling to your losers — and many investors do tend to water their weeds and cut down their flowers, as Peter Lynch said – you aren’t coldly evaluating the prospects of securities you still own. You may be succumbing to what psychologists call “loss aversion”— the human tendency to avoid any sort of loss whatsoever. (Richard Thaler, the behavioral psychologist, thinks this may be a carryover from the days when we lived in caves, where any sort of loss —shelter, food— threatened our very lives.)
2. If your losers are in taxable accounts, you should probably sell them just for the tax deductions, and buy something similar but not “substantially identical” (or you can’t deduct the losses). You’ll be eating your cake and having it. Holding onto your losers because you believe that they’re only “paper” losses might keep you from engaging in “loss harvesting.”
My own view: One of the best pieces of advice ever given to investors is: Sell your losers and let your winners ride. Another fine piece of advice: When in doubt, throw it out.
*See the happy moron
Hd doesn’t give a damn.
I wish I were a moron—
My God, perhaps I am!
By Warren Boroson
What is the difference between a loss on a security you still own shares of—and a loss on a security you have unloaded? Is it a “distinction without a difference”? Like the distinction between “an unmarried man” and “a bachelor”?
Truth to tell, there isn’t much of a difference. The difference, so to speak, is paper-thin.
After all, if you were once worth $1,000,000 and you now have a “paper” loss of $400,000, you’re worth only $600,000 —whether you’ve sold or not. Try actually selling your losing securities for more than their market value, and reality will quickly set in.
But the door is not entirely closed. You still own the security. So, if it goes up, your loss will shrink. And if it goes down, your loss will balloon.
It’s hard to think of a good analogy. A disease has not been cured; it is only in remission? There are at least two benefits to believing that a paper loss is markedly different from a real loss.
1.You’re a happier person. (OK, so maybe you’re the “happy moron” that Dorothy Parker wrote about.*)
2.You may hold onto your losers instead of selling them -- and thus maintain your (presumably reasonable) exposure to the stock market. Besides, stocks usually go up, don’t they? And stocks that go down a lot tend to bounce back, don’t they?
But there are also undeniable drawbacks to holding onto losing securities:
1. If you mindlessly cling to your losers — and many investors do tend to water their weeds and cut down their flowers, as Peter Lynch said – you aren’t coldly evaluating the prospects of securities you still own. You may be succumbing to what psychologists call “loss aversion”— the human tendency to avoid any sort of loss whatsoever. (Richard Thaler, the behavioral psychologist, thinks this may be a carryover from the days when we lived in caves, where any sort of loss —shelter, food— threatened our very lives.)
2. If your losers are in taxable accounts, you should probably sell them just for the tax deductions, and buy something similar but not “substantially identical” (or you can’t deduct the losses). You’ll be eating your cake and having it. Holding onto your losers because you believe that they’re only “paper” losses might keep you from engaging in “loss harvesting.”
My own view: One of the best pieces of advice ever given to investors is: Sell your losers and let your winners ride. Another fine piece of advice: When in doubt, throw it out.
*See the happy moron
Hd doesn’t give a damn.
I wish I were a moron—
My God, perhaps I am!
By Warren Boroson
