Top Investing Mistakes – Holding Stocks Too Long or Too Short

You often hear experts and articles suggesting you not to get too greedy because it will always bite you with force.  While there is a lot of truth in that statement, I believe the opposite is true under certain circumstances.

People have the tendency to hold onto their losses too long while holding onto their gains too short.  When the stock is advancing, people are “educated” to take gains because that is the right thing to do, right?  Greed is the quickest way to lose money.  Sure, there is a lot of validity to that, and that is definitely a great strategy to quickly take gains and minimize exposure to sudden reversals derived from major news, earnings, government intervention, and hell even Swine Flu as suggested by the CNBC experts.  However, this strategy significantly puts investors who also hold onto losses too long at risk.

One of the hardest challenges an investor faces is accepting one’s loss and moving on before the situation worsens.  Many investors made the same mistake in the last 2 years when the stock quickly depleted in price.  Originating from the fear of missing the “bottom” on its way to recovery and the hopes that the stocks will soon recover, investors struggle to let go of their position and cut the loss.  How many people do you know personally who employed this behavior and ended up paying an immense penalty last year?  Probably plenty.

When an investor starts to hold onto losses for a prolonged period of time and lets the losses grow, but sells the stocks too soon when the stocks do finally recover fearing that it will soon head south again, he/she is certainly guaranteed a loss.  To make the matter worse, an investor repeats that behavior multiple times for a longer time period, you are looking at a portfolio position that is rapidly losing value.

It is much easier to sell and take profit than to sell and take a loss because it is emotionally far easier to leave a position with a win than with a loss.  However, this very behavior puts investors at risk and can quickly lead to depletion of his/her position.  Therefore, I argue that sometimes it is important to hold onto your stocks when they are going up, not because you are greedy, but because it is important to recognize a trend and take full advantage of the uptrend.  On the other side, it is absolutely critical to recognize the trend down and cut your losses early regardless of how hard it is to accept a loss.

Bottom line, don’t hold onto your position too long or too short.  Have a plan both ways and stick to it.

Also read – Top Investing Mistakes – Investing Against the Trend