It’s OK to Cut Loss in Stocks!

Pinoy Money Talk

You probably wonder: During bearish markets, should I sell my stocks and realize a capital loss or continue holding on to them and wait for stock prices to recover?

Honestly, we cannot give you a best, 100% correct answer. But we can help you make a decision when to sell your stocks. We wrote a pretty popular article about this previously, and if you’re interested, you can read about it here: When’s the best time to sell stocks?

Basically what we’re saying in that article is, you sell your stocks once the price has hit a Target Price or Target Return you prefer. That makes sense but what if the stock is in a freefall and you’re seeing losses day by day?

Our simple advice: Cut loss!

Mature and intelligent investing

Cutting your losses is normal and is part of a healthy stock investing strategy. It’s also a sign that you are a mature investor who recognizes that investing cannot all be about making profits. That’s ideal, but making money everyday in stocks is just not possible. Sometimes it requires that you make the hard decision to sell and to recognize a capital loss.

Intelligent investors know that cutting loss is better than actually waiting and hoping for the time that the price will return to its previous level. Yes that is a possibility, but it could take years!

Stock prices may not recover

For example, those who participated in the Cebu Air Inc. – Cebu Pacific (CEB) Initial Public Ofering (IPO) in 2010 bought the stock at P125.00 per share.

You probably know that after the IPO, the CEB stock has not reached this price level ever again! If you bought CEB at P125.00 in 2010 and held on to it until now, you haven’t made any money yet! That’s not smart investing.

Do not fall in love with a stock

The key is to not fall in love with a stock. If expectations have changed and the company is expected to underperform, sell and cut loss!

If losses have piled up and there’s no sign that price recovery is about to happen soon, sell and cut loss!

Cutting loss is merely the opposite strategy of having a Target Price higher than the price you initially bought the stock. What you do is set a “stop-loss” level which would tell you it’s time to sell your stock.

How to cut losses

How exactly do you “cut loss”? Several experienced investors set their “stop-loss” percentage at 10%. This means they sell the stock once the price has fallen by 10% compared to their purchase price.

For example, if you bought Cemex Holdings Philippines (CHP) stock at its peak of P12.00 in 2016, you know that you’ve already lost a lot if you’re still holding on to it until now. This 2018, CHP is trading at around P3.00 per share — a huge 75% loss!

Following the 10% stop-loss rule, you should have already sold the stock at a 10% loss, that is, sell it when it was trading at P10.80. If you have a higher appetite for risk, you can set your stop-loss percentage at 15% or 20%. That’s your decision.

The only requirement is that you have the confidence and tenacity to sell the stock at a loss.

Of course, it’s going to be difficult especially when you realize you are actually losing money. But cutting loss is a more proactive strategy in the hopes of putting an end to an otherwise continuous freefall.

What to do after you’ve cut losses?

What do you do then with the cash proceeds from the stocks you sold?

Well, you could opt to switch to other stocks with better prospects. There are still dozens of other companies to choose from! Of course, there is no assurance the new stock will give you sure profits, but “cutting loss and switching” is how successful investors do it.

So if you’re seeing red in your portfolio, assess it and make a decision. If need be, swallow the bitter pill and press that Sell button.

Don’t worry, it is ok to cut loss. Move on and buy the next stock!

Pinoy Money Talk is an educational website about money, banking, investments, and personal finance which started in 2005. Its group of five writers consists of one equity research analyst, one fintech startup owner, one finance educator, and two investment professionals.