“An investment in knowledge pays the best interest.” — Benjamin Franklin
Nobody likes to lose money on an investment. Who wants to deal with the questions from an investor or a spouse about why your brilliant company suddenly lost a big chunk of its value.
And yet those kinds of embarrassing situations take place all the time. That’s why, in my opinion, it’s important for investors to keep their eye on a long-term investing plan and to be able to see things through to completion.
In my view, the most crucial aspect of investing is to understand first why you invested in an asset in the first place. If that analysis is still sound, then you’ll be on firmer ground to hang on to it when the price moves against you.
Staying Zen
Why do so many investors sell, and then lose money on the asset, only to discover that if they would have waited, the price of the asset would have recovered?
Unless you are investing in a situation which is highly influenced by tax considerations, a good rule is you don’t want to sell at the lows.
If you are upset about the loss in a specific position, research it some more, or go back to the original reason of why you invested initially.
Did the circumstances with the company change? Is there new leadership at the top? Have the assets of the enterprise been impaired since you first bought it? Is there much more competition in the industry?
Keeping Cool
Any of these developments could be the reason for a stock decline and may be worthy of serious consideration.
Yet often, short-term price moves aren’t that important, nothing has transpired to cause the stock to drift downward, other than the trading volume of sells is outnumbering buy orders.
Trading losses are usually temporary, so identifying what is happening with the business is the highest priority.
Traders react to business news, and the stock price follows accordingly. Over a long period of time, a great amount of money has been made just by hanging in there with excellent companies which have great assets.
Takeaway
When the price drops, it presents an opportunity to own more, provided you understand how, why and when the price should recover.
Naturally, the price you pay is critical as well, but my main point is remembering to research well and use your knowledge to help you become more patient with your investing.
Photo Credit: Chamathka U Gamage via Flickr Creative Commons
Disclosure: This piece is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.
