Dear Liz: I am retired. My income is from a small pension, Social Security and dividends and interest from investments. I’ve made some bad investments, but I’m still earning a satisfactory return. Is there some kind of formula that I can use to determine whether I should sell a stock, take the loss and seek another investment or keep the stock, enjoy the dividend and worry the stock might drop further?
Answer: One approach is to ask yourself if you’d buy the same stock today. If not, then it may be time to sell these shares. Be sure to consult with a tax pro first because you may be able to use losses on one investment to offset taxable gains on another.
You also might ask yourself if it’s time to transition away from active investing and individual stocks. Most people aren’t able to buy the stock of enough companies to be truly diversified. Then there’s the daunting task of staying up to date on the fortunes and prospects of each company and industry. That’s way more work than most people can handle. Even if you’re up for the task now, you might not be in the future.
Also, most people don’t do well with active investing. Trying to figure out when to buy and sell for maximum gain usually results in excess trading costs that lower your returns. It’s also too tempting to hang on to a losing stock rather than admit you made a mistake, or to chase “hot” stocks that have already had their biggest gains.
A better approach would be a portfolio of mutual funds or exchange traded funds that’s regularly rebalanced, either by a financial advisor or a computer algorithm. If you opt for funds that mimic a market benchmark, you’ll be assured of matching the market and getting a better return than most active investors can achieve.