Investing Advice

When Is It Time to Dump a Loser? The Investor’s Dilemma

photo: Robert Gaal

This week I’m thinking about what might be the ultimate first-world problem. I bought a new laptop and am trying to decide what to do with the old one, which still basically works.

If I keep the old laptop, I can use it as a spare for when the new one breaks and has to spend a few days at the You-know-what Store. Every time my laptop is in for service (and this happens to me more than I deserve), I complain loudly about how much work I am not getting done. A spare would save my wife a few days of torment. (Instead, I could start complaining about how I have to use this old, slow laptop.)

On the other hand, I could get several hundred bucks for the old laptop on Craigslist. I never complain about cash. What to do?

I sat on the problem for a couple of days before realizing that turning it around made the answer obvious. If I had the cash in my lap instead of the old laptop, would I use the money to go out and get a spare laptop? Of course not. I’d spend some here and save some there and go back to complaining when my laptop occasionally breaks.

There’s a lesson here that has little to do with laptops and everything to do with one of the most common questions in investing: when do I sell and investment whose performance is no longer up to snuff?

Okay, when do I sell?

It’s a question I hear all the time: “I have this investment that has lost money. Should I sell now or wait for it to go back up?”

Seen in the spare-laptop context, though, the question is posed the wrong way. Whether you already own the investment is irrelevant.

The right question is: “Say someone took away your investment and gave you the current market value in cash. Would you use the cash to buy the investment back?”

No? Then sell it. As investment expert Larry Swedroe put it recently:

“If I didn’t already own the asset, how much would I buy today as part of my overall investment plan? If the answer is, “I wouldn’t buy any,” or, “I would buy less than I currently hold,” you should sell. That is true of a bottle of wine, a stock, a bond or a mutual fund.”

And we can go further. As you continue to invest, are you buying more of that same asset each month? If not, why not? If you’re holding onto it, you must think it’s going to grow. Why not buy more?

The wrong way to invest

But the question about when to sell is even dumber than I’m making it sound, because people tend to ask that question when they’ve invested in something interesting.

In investing, “interesting” is just another word for “risky.” Beyond that, when you feel like you’ve gotten in on a special offering or at a special time, it’s harder to let go. Say you bought some Apple (AAPL) stock back in the pre-iPod era, and it’s been very good to you. It’s hard to sell today without feeling disloyal, even if you wouldn’t buy more at the current market price. (Not that I have any opinion on Apple’s future stock movement.)

By contrast, nobody falls in love with boring index funds, and it’s a snap to buy and sell them with no commission and no guilt any time you want.

Of course, a portfolio you’d buy again is no guarantee against bad times. I can’t predict the future of the market, and the evidence is good that nobody else can, either. But a portfolio full of interesting old chestnuts is probably too expensive and out of line with your overall risk tolerance and strategy—if there’s a strategy there at all.

January is coming soon. Here’s a New Year’s resolution you can actually keep: take a look at your portfolio. If there’s anything in there you wouldn’t buy again today at the current price, dump it and buy a boring index fund. If it’s going to cost you to unload the investment–say it’s a mutual fund with a redemption fee or an annuity with a surrender fee–make a note on your calendar on the day you can sell without a penalty.

I sold my old laptop on Craigslist. The proceeds are going into a nice, boring investment. I’ll avoid having a “should I sell?” moment—and I should wrap this up, because with my luck my new laptop is going to break any second now.