Can We Change Our Minds About An Investment?

If knowing what you know now, you would not invest in a stock, then at least you must cut down your investment

Change is the only constant in life. For the investor, this change could simply be the rising or falling of the stocks in his or her portfolio over a period of time. However, one aspect of change that we seldom fail to recognize is change that comes from the side of the investor.

The reason we pick a stock now is that based on what we know about the stock or the information that we are privy to about them; we are confident to a certain degree of its potential as well as its alignment to our individual investment goals.

One of the most popular investment mantras by Peter Lynch is that at the end of every year, the investor should take a step backward and ask himself, “Knowing what I know now, and the price at which these stocks current trade, would I be willing to invest new money into the company under these circumstances if I didn’t already own a position?”

A lot of times, these discoveries could go beyond the historical trend or the price of a stock; the stock might not seem like a good option again. In any case, where the answer to that question is a clear “No”, then you need to determine the kind of steps to take.

The investor really does not stand anything to gain by having sentimental attachment to his investments. You generally learn more about the stocks – its newly introduced risks and so on, the longer you have it. So, in the face of new information, the stock might not be worth it anymore. There are some general steps you can take at this point.

The first step is to reduce additional investment. If knowing what you know now, you would not invest in a stock, then at least you must cut down your investment. You can decide to reinvest only 50%, for example.

You can also decide not to purchase more of the shares and just leave it as it is. For this, you would not only stop purchasing additional shares, you would also stop reinvesting gains completely – at least not on that stock.

The final option or step (when all else don’t seem they are good enough to curb your new distaste for the investment or doubt in it) is simply to start selling the shares so as to minimize possible losses.

Of course, nobody will purchase stocks that are expected to reduce in value so you need to have a stop-loss mechanism in place to cut your losses where you had misread the potential of the investment.

Many investors have recorded huge losses because even when the information they have says otherwise, they believe the stocks would bounce back eventually. This is how many companies have gone bankrupt on their investors.

It is probably better to cut out an investment than be completely negligent of it because it doesn’t quite work for you anymore. However, investment decisions should not be made in isolation.

Every step you takes can make or mar you; propel or halt your wealth goals. You just need to be as objective as possible with yourself.

Written by Lawretta Egba.