Last Updated on January 15, 2025
Overview – Cut Your Losses Before It’s Too Late
One of the hardest choices an investor will have to make throughout their career is knowing when to cut their losses.
It’s tempting to believe any challenges investors face can eventually be resolved with enough time and persistence, and while this may be true in many cases, this is not a universal law. Just because you spend prodigious amounts of time and energy trying to improve or fix something doesn’t necessarily mean things will get better.
As you may know from your own life, there are instances when choosing to let go is the smarter choice than choosing to stay and try to fix something beyond repair.
Investing is no different. There will be times when your best option is simply to cut your losses and move on to, hopefully, greener pastures. However, deciding when to cut your losses is much easier said than done.
“Cutting Your Losses” Applies to Multiple Aspects of Investing
While the phrase “cut your losses” is usually associated with selling poor-performing investments, knowing when to move on applies to multiple aspects of an investor’s activities.
No matter who they are and what backgrounds they hail from, investors are bound by the same limits: They all have limited amounts of time, capital, energy, patience, and other resources to work with. Of course, some investors will have more abundant resources than others, but an abundance of resources is still finite.
Due to this reality, one of the worst things an investor can do with their finite resources is to spend them on endeavours that ultimately prove to be unfruitful. In everything that investors do, they must constantly be aware of the probability of it being unsuccessful or unprofitable.
The longer an investor pursues an unsuccessful opportunity or activity, the harder it will be to recover the resources they’ve already spent. Worse yet, some resources can’t be recouped at all.
While it’s easy to say “Stop pursuing unsuccessful endeavours”, the challenge is figuring out which endeavours can be classified as such, and figuring out when to stop. After all, some seemingly unsuccessful endeavours can sometimes take a turn for the better.
In the following sections, we will go over different aspects of an investor’s work that involve them spending their limited resources, and best figuring out when it’s time to move on before passing the point of no return.
Not Every Potential Investment Will End Up in Your Portfolio
If there’s one thing all investors, both new and experienced, know, it’s that not every prospective investment they analyze will end up in their portfolios. This shouldn’t come as much of a surprise: in our own lives, we’re constantly presented with multiple options, but in the end, we must decide which ones to forego.
Fortunately, the likelihood of performing in-depth analysis on dozens of unprofitable prospects is slim, assuming an investor has taken the correct steps before starting their analysis. In one of our previous guides, we discussed how investors can generate investment ideas, starting from a broad search down to a handful of prospects that are seriously worth analyzing further.
If done correctly, investors will only have to go through a few prospects. While some of these prospects will end up being rejected, the time and energy spent will be significantly less than having to work through, only to end up rejecting, dozens.
Investors will always have to perform thorough analyses of prospects that interest them, and only after performing this work can they definitively say whether it’s worth pursuing or not. Therefore, it’s largely unavoidable for investors to spend their limited resources on prospects they end up passing over.
However, the more thoroughly investors perform their high-level search for investments that interest them, the fewer prospects they’ll have to inevitably reject later on when studying them.
Knowing When to Sell Before It’s Too Late
Most investors have no qualms when it comes to purchasing investment instruments to add to their portfolios, but opinions start to diverge when it comes to selling them.
Some investors routinely sell certain investments with the hopes of pocketing capital gains and therefore have minimal issues when it comes to letting go of certain holdings. Other investors, however, choose to hold onto their investments for the long term, making it difficult to let go of them.
No matter how investors feel about selling, there is one truth that cannot be ignored: Investment merit is malleable; just because an investment is worth owning today doesn’t mean it will stay that way forever. A prized investment today can turn into a major liability in the future.
When certain investments start to show clear signs of deterioration, such as a gradual decline in market value over the past several quarters, investors must seriously consider the possibility of selling to cut their losses before they become too steep. The longer investors hold on to failing investments, the harder it will be to recover from the sustained losses.
Now, anyone can say “Cut your losses and sell as soon as possible”, but recklessly selling can be a very dangerous thing, especially if there’s no compelling reason to sell in the first place.
Because of this risk, there are some things investors may first want to consider before deciding to part ways with certain investments.
Changing Investment Strategies That Have Led to Minimal Success
Investors deploy all kinds of strategies to try and achieve various investment goals. Whether it’s choosing to invest in a handful of industries, focusing exclusively on certain countries, or only acquiring certain investment instruments, investment strategies can range from very simple to highly complex – it all depends on what investors want to achieve.
Regardless of the strategies investors choose to follow, what ultimately matters is that their strategies produce the results they want. What these “results” look like will vary, but it’s important to have a clear understanding of what exactly they are.
Now, some investors may insist on following certain strategies with the hopes of it working out, even if the current results say otherwise, but the longer an investor does this the harder it will be to get back on track.
The sooner you cut your losses with ineffective investment strategies, the less time and capital can potentially be wasted. Knowing when to change investment strategies before falling victim to the sunk cost fallacy is crucial.
Fortunately, changing or adjusting investment strategies usually isn’t a big affair. A failing investment strategy may only need certain adjustments to resolve its underlying issues. If a strategy is beyond saving, then there’s also the option of deploying backup investment strategies, assuming an investor has them.
Wrapping Up
All investors, regardless of their backgrounds, are bound by the same reality: the resources they have to work with are limited. Because of this, investors must take great care in ensuring they use their limited resources on activities that prove to be successful or beneficial.
Despite this, some investors still make the mistake of pursuing unfruitful endeavours, wasting precious resources that may be difficult, or worse, impossible, to get back. While the occasional waste of an investor’s resources is inevitable throughout their careers, they can minimize it by knowing when to cut their losses.
Investors who know when to move on before it’s too late can spare themselves the trouble of trying to dig themselves out of a deep hole, enabling them to put their limited resources to productive use as much as possible.
