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How to “clean up” ‘long time, big losses’ in your investments?

Frequently asked question?

One of the most frequently asked questions that I get is “I have big losses in my investments which I have been holding for many years - What do I do?”

I can do a better job?

From what I have been told in my 35 years in the financial services profession, and the 200 or so calls and SMSs that I received weekly, during my 3 year plus stint as a money radio talk show host for about an hour weekly - the answer that people who ask this question get, may generally be something along the lines of - “let me (financial adviser or financial institution) manage your portfolio or I can do a better job for you”.

My answer to this question has always been - nobody knows what investments will go up or down tomorrow, next week or month, or the years ahead.

So, for investors who switch their portfolios or get advice to “clean up” their portfolios - normally one of the following scenarios may typically happen:-

… You are advised cut loss by getting rid of your losses and start all over

… The new portfolio goes up in the short term because the adviser was lucky in making the right guesses

… The portfolio goes down because the guessing was wrong

So, what really matters may be what happens in the long term like after 3, 5, 10 or longer years?

Mindset on investing losses?

After about 3 to 6 months - she will start to withdraw about $1,500 monthly from her portfolio - by selling the fund (out of the 7 funds) that has increased the most.
She has in effect, set up her own pension fund.

But here’s a possible problem - from a mindset perspective - what some investors really desire to achieve, may be to recover their losses ( mindset) and have say average returns of about 5 or 6 per cent per annum, from the time the investor originally first invested (not from the time the new adviser took over).

I must say that it surprises me that so many people take it so hard when it comes to accepting losses.

In other words - you may be surprised that quite a lot of people - at least from a psychological perspective may hope to recover their losses and turn a portfolio with big losses for many years into a performing one.

Whilst we should not debate the merits of such “thinking” - from my experience it is often what people who asked this question may be hoping to achieve.

After all, the fact that they kept huge losing investments after so long, may be indicative of their mindset.

Why have huge losses after many years?

First and foremost, we need to understand that the primary reason why people can end up with an investment portfolio with big losses after many years - may be due to the portfolio being not diversified and taking too much risk in the first place.

At this point of the discussion, let me say that we need to distinguish between investments that are unlikely to recover (such as unlisted investments from companies that may be in the Monetary Authority of Singapore’s (MAS) investor alert list), listed investments like stocks that may be a “dead” stock for years from the high price that the investor had originally purchased them, and investment funds, exchange-traded funds (ETFs), etc that may arguably recover eventually, because a market or asset class, index, etc -  historically will have an upward bias.

In other words, it may only be a matter of time before the fund recovers, which may not the case for individual investments like stocks.

The problem of course is nobody knows for how long? For example, the Japanese stock market is still more than 60 per cent down after 25 years.

“Mindset” mistakes to avoid?

The biggest mistake that investors make in my view is that they switch from a high risk non-diversified portfolio or investment vehicles like individual stocks which are by definition high risk - to a lower-risk diversified portfolio- and then expect to recover their huge losses in the short term.

Another common mistake may be holding on to their stocks when the entire stock market is in a bullish phase, and their loss-making stocks are still stagnant relative to the overall bull market.

We should consider changing the mindset that my entire portfolio with a financial institution, must make money (a lot of money for some people) before I will sell. We could consider selling those within a loss-making portfolio that has gone up the most, whenever we need money.

We cannot expect to always never lose money on every investment that we make in our lifetime!

 
Robin Han
Leong Sze Hian

Dr Leong Sze Hian is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, has authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper column, Wharton Fellow, SEACeM Fellow, acting managing editor and columnist for theonlinecitizen, columnist for Malaysiakini, a Member on the CIFA International Advisory Board, executive  producer of the movie Ilo Ilo (8 international awards), treasurer of Maruah, and invited to speak more than 100 times in more than 25 countries on 5 continents. He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.