| For
Immediate Release
Vancouver, BC (August 15, 2001):
Nobody I know likes to lose money on investments.
Watching an investment that does not measure up
to expectations can be a traumatic experience.
It usually means that you were wrong about the
investment analysis.
Adrian Mastracci, fee-only investment
counsel and financial advisor with Vancouver's
KCM Wealth Management, comments,
"Making portfolio selections is not about
always being right. Part of investing is about
coming to grips with the prospects of being wrong.
This experience touches us all, including the
professionals."
"It is important to admit that you were
wrong, and equally important to do something about
it," notes Mastracci, "However, the
doing something part is difficult for many investors.
To illustrate the pain, I've developed the accompanying
table called the threshold of discomfort."
Mastracci's table of discomfort unfolds like
this:
Threshold of Discomfort
"The reasons for your loss are not important.
The question is whether the loss is sufficient
reason to reduce your investment position,"
says Mastracci, "If your strategy is not
delivering on expectations, it may be time to
act like a professional, take the loss and move
on. This approach applies even more to portfolios
whose core holdings are individual stocks."
"It's a catch-22," notes Mastracci,
"Say you lose 50%, you have to gain 100%
just to breakeven. If you lose 60%, you have to
gain 150% to breakeven. That's quite a turnaround!
So how many of these miracles have you experienced?"
Mastracci makes the following observations about
incurring losses:
- What is most detrimental to portfolios is
not incurring losses; rather it's keeping them
far too long.
- Many investors cannot bring themselves to
sell a loss position, often adding to it with
the hope that it will bounce back to breakeven
or better.
- The turnaround either does not materialize
or is long in coming -- either way the losses
run unchecked.
- As proof, many stocks have declined more than
60% from their highs in the last 18 months.
- Astute portfolio managers have the nerve to
admit to being wrong.
- Being wrong does not make a bad portfolio
manager; staying too long with the loss is the
dilemma.
"We know that you can't stop all losses
from happening to you," says Mastracci, "So
how can you contain their impact on your portfolio?"
Mastracci offers his approach to containing the
impact of investment losses, which works well
for him and his clients:
- Don't get married to your investments.
- Plan on some of your investments to result
in losses.
- Refer to the table, establish your personal
threshold of discomfort and don't second guess
yourself.
- Investment merits are always primary considerations;
tax implications are secondary.
- Judge your investments on their appropriateness
to achieve your long-term goals.
- If the fundamentals change, take the loss
and select other investments with upside potential.
"Investing is a game of probability,"
notes Mastracci, "Yes, you can bail out too
early on a loss position. However, successful
investing is about future expectations, not about
hindsight."
"It's less painful to bail out, rather than
to insist that you are right and then bail out
later with bigger losses," suggests Mastracci,
"Each loss that you incur started out as
a very small loss. If you choose to ignore the
situation, the painful problem does not usually
go away."
"Be diligent and objective about focusing
on your losses," summarizes Mastracci, "Invest
like a professional -- your first loss is your
best loss. The medicine hurts, but your investment
experience will improve."
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