Prepared to Take Your Loss

By: Hans Bool
Submitted: 2007-01-17 15:36:26
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Some planned changes in life turn out to be less promising than expected. What should you do in such a case?

This “concept” of taking your loss is used in the investment area. The principle is simple. You have built up an investment portfolio with different investment instruments. Each individual instrument (a stock, option, future, bond, mutual fund, etc) is priced as an outcome of a market process. And the value of the portfolio changes in a moderate way; some titles increase in value other decline during a trading day. In the end the value of your portfolio is more or less in line with the development of the market. However, there is often some stock in portfolio that turns out to be underperforming: the wrong choice.

For example you buy a stock at 80 dollars and after one week of trading the value has declined to 64; you loose 20 percent on this individual stock. The damage to your portfolio is less, because of the fact that it (the stock in portfolio) is only – let’s say – 20 percent of the total value of the portfolio. In that case the value of your complete portfolio diminishes by only four (4) percent. Now when do you decide to sell this particular stock in portfolio?

There are many investment rules you can use to cut your losses. For instance if you prepare your investment – the stock you buy – with a stop loss order; if the price of the stock diminishes by 20 percent you will sell the stock.

Some changes resemble investments. You change (buy) because you expect a positive outcome (a higher return) after the change.

Some examples are: you start a (business) relation, you move to another city or you change your job. For all of them you should try to cut your losses if the change is not returning your expectations.

For instance, you can end the relation. This is often not easy but it is possible. When changing a job however it is not that easy to return to the initial state; you have left and there is no way back. In return, the new job will leave you with more experience and an extra line on your curriculum. Moving to another place (another country) is already more difficult to end. In this case there is no way back as there is when you sell a stock. Such a change is irreversible because the situation before you left is no longer the same, nor are you after the new experience.

The hard part in taking your loss -- either with investments or in real life -- is the actual acknowledgement that your action isn’t giving the expected results. This is especially hard to cope with because we -- humans -- do not like to admit that we have been wrong, that we have made a mistake or that we could oversee all upfront.

But unfortunately, we do make mistakes.

And therefore you should be prepared when starting a mayor change. Think of it as an investment where there is always the possibility that the expectations will not be met, like a stock that will never recover its initial value after a tumble. Think what you would do in that situation. Add this step in your plan including the stop loss action at the moment of truth. We cannot predict the future. We can only be prepared.

© 2006 Hans Bool

Hans Bool is the founder of Astor White a traditional management consulting company that offers online management tools. Have a look at some of our free management tools

Article source: Expert Articles

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