Should you sell your stocks

The stock markets have been trending down for the good part of 2022 and investors are feeling the heat.

Most investors whom we have interacted with believed the bear market will continue and are putting off buying stocks.

Some don't even want to look at the markets as we see a general drop in interest for investing content.

A smaller group of investors is still involved in the markets and is looking for opportunities to buy. They have cash to deploy but still the fear can be debilitating.

Some have flocked to fixed deposits or bonds as yields rise. They feel safer in this period as they are capital guaranteed (at maturity). This flight to safety behavior is common throughout history.

That said, buying stocks are still an easier task than selling.

No investor is able to build a perfect portfolio all the time. There will be mistakes made no matter how experienced one is - even Buffett still makes mistakes today so no one is spared.

That means that we will always have mistakes in the portfolio to admit.

But it is very uncomfortable to confront our own mistakes and to face the huge paper losses. So we tend to live in denial.

Moreover it is hard to remain clear headed once we look at our portfolios especially at this point in time.

It is not a bad idea to refrain from looking at the portfolio if you know you might do something rash - liquidating everything just to stop yourself from feeling the pain.

This is because stocks tend to go up over the long-term and you shouldn't give up especially the portfolio has already been down. You don't want to sell only to see the value recover later.

Of course not all the stocks you hold will ever recover to the prices you bought at.

So for those who can remain logical should review their portfolios even in a bear market.

We will share three questions that have helped us greatly.

First, we need to identify our mistakes. A useful question would be "is the issue affecting this stock temporary or permanent?"

Generally speaking, if the issue is temporary, hold. If permanent, sell.

But it might still be hard to sell due to the loss aversion and endowment effect.

Loss aversion means we don't like the feeling of realizing the loss so we avoid selling losing investments.

Endowment effect means we value the stocks more if we own them and less if we do not.

The second question we can ask is, "if you don’t own the stocks you currently have, will you buy them back?"

This is to catch us for having the endowment effect. If the answer is yes, hold. If the answer is no, sell.

If you are still holding despite knowing that you should sell, you are probably caught in the loss aversion situation. Unfortunately we don't have a solution for that.

The third question is, "if you have sold this stock, what can you switch to?"

This is to tackle the opportunity cost issue. Sometimes we hold a stock due to loss aversion but the capital could have been redeployed to a stock that give larger gains.

You don't need to make back the way you lose it because money is fungible. You can lose money in stock A but you can make it back or more with stock B. But most would prefer to make back the money in A which may not happen.

We are humans and we have defense mechanism to prevent us from doing unpleasant things even though we should do them. Hopefully this sharing would give you a little push to get you going.