Long fairways of green grass is the open highway I like to drive in the summers. What I like and what I get are two different realities though. Usually I find myself in the rough, woods, water, or neighboring highway. Anyone who’s ever played golf has found themselves trying to recover from a bad shot. The problem, however, is that most people try to make up for their mistakes by powering an impossible next shot over the river and through the woods. Rarely does this work, and now you are in an even deeper hole. Golf, like investing, is often just about minimizing mistakes and not losing.
In a round of golf, the concept is simple. Each time you hit the ball, you try to advance it closer to the hole. Investing is the same—each time we invest we try to make more than we started with. In both cases, when we make mistakes, we don’t want to compound them.
The math of an investing mistake is very discouraging. If you invest $100,000 and suffer a 50% loss, you have $50,000. In order to make that ground up, you don’t need a 50% gain; you now need a 100% gain! There is ample research to show that investors in this position make irrational decisions to try to recoup their losses by taking on risks that do not suit their investment profile, or have improbable odds.
In golf, if you hit a bad shot, you take your medicine and punch out back into the fairway. This puts you in a position to have a great next shot and only lose one stroke. With investing, there are ways to accept your current, perhaps unpleasant, situation and prevent further losses.
The easiest method is not to sell. You may have a great investment on your hands, but the market is going through a short-term correction and will likely recover. In investing, you only lose when you sell. Vince Lombardi once said, “we didn’t lose the game; we just ran out of time.” You wouldn’t let your team quit at half time if they were down. You don’t have to end your investment game just because you’re down. Buy investments you love, and hold on to them for the long run.
The second thing you can do is add to your position. If you are following a dollar cost averaging strategy, this pullback in price is beneficial to you, as it lowers your average cost basis. If you liked the price of your initial investment, you should love the price you can buy it at now! Again, as a long-term investor, corrections often offer opportunities to buy low now and sell high later.
Perhaps all is lost in the investment, and you find yourself completely demoralized and want nothing to do with it. There still may be hope! If you own the investment in a non-qualified (non-retirement) account, you can sell the position and realize the loss. This loss may then offset gains you have in other investments. In other words, use this losing position to exit a winning position with a sizeable gain and owe little or no taxes. This is all perfectly legal in the eyes of the IRS and is known as tax-loss harvesting. There are some additional idiosyncrasies to this strategy, and it’s best to talk with a tax advisor to be sure you may use the losses first.
Investing is a long game. Sometimes the winds are blowing with you while other times they blow against you. When they are blowing against you, remember your strategy, and don’t take unnecessary risks that can put you further behind. Stay the course, invest when value is presented, and take advantage of tax rules. Just like in golf, keep moving the ball forward and your portfolio balance upward.