Making losses on your stock holdings can be a challenging experience for any investor. However, it is a relatively common occurrence due to the short-term movements of the stock market being difficult to predict. For example, recent declines across a wide range of S&P 500 stocks were impossible to foresee only a matter of months ago.
Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) Warren Buffett (Trades, Portfolio) has experienced many challenging periods for the stock market during his investing career. He has made losses on some of his holdings, but his overall performance has been overwhelmingly positive.
At a time when many investors may have experienced poor performance within their portfolios, his advice on dealing with stock market losses could be invaluable.
Long-term approach
One of the most effective ways to cope with losses within your portfolio is to adopt a long-term time horizon. Your stocks may be making losses at the moment, but they are unrealized losses until they are sold. Therefore, allowing them time to recover may mean that losses are ultimately turned into profits.
The past performance of the U.S. stock market as a whole shows that it has continually experienced declines followed by recoveries. Sometimes, its rebounds can be fairly rapid. However, on other occasions, it can take time for investor sentiment and the prospects for the economy to recover.
Adopting a similar time horizon to that of Warren Buffett (Trades, Portfolio) could be a logical step for investors to take. According to the Oracle of Omaha, “Our favorite holding period is forever”.
Although no investor has an infinite amount of time for their investments to deliver successful recoveries, Buffett’s standpoint serves to show that being a patient, long-term investor can improve your overall returns.
Reviewing your holdings
Given the uncertain economic outlook that may be ahead, assessing the financial strength of your stock holdings could be a good idea.
Some industries, such as retailers and airlines, may be hit harder by the uncertain economic outlook than other sectors. Therefore, understanding the cash position, leverage and cost base of your holdings may enable you to own those companies that are more likely to survive what is becoming an increasingly likely recession in 2020.
If you find weaker stocks, or companies with outlooks that are deemed too precarious relative to your risk tolerance, selling them could be a logical step, according to Warren Buffett (Trades, Portfolio):
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks”.
Taking a loss on a stock is never a desirable outcome for any investor, but it could be a profitable decision if it enables you to purchase a better business that could deliver higher returns in the long run.
Buying opportunities
Experiencing losses within your portfolio can affect your emotional state. Even if you are confident about the recovery prospects of your holdings, and you have a long-term time horizon, making temporary losses on your stocks can make you feel less optimistic about the idea of buying equities.
However, according to Buffett, buying stocks during market downturns is an effective long-term strategy, as “The best chance to deploy capital is when things are going down.”
By focusing your energy on buying stocks during market downturns, it is possible to capitalize on wide margins of safety that may only be present for a short time period. This could catalyze your portfolio’s returns through successfully positioning it ahead of a likely long-term recovery for the economy and stock market.
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- What's Next for the S&P 500?
- Unearthing Quality Stocks in a Market Crash
- Successful Investing in a Bear Market
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