When you see it written down on paper, run your winners and cut your losers, it makes perfect sense. Why would you do anything else? Well, even though it makes perfect sense on paper do we always abide by these simple rules?
Easier to take a profit
First of all, there is nothing wrong whatsoever in taking a profit no matter what size. The day when it does not make sense to even consider banking a profit is the day when investment markets will have gone absolutely crazy. However, there are some things to consider when you are looking to take a profit.
Whether you are a seasoned campaigner or somebody relatively new to the property investment market the chance to take a profit can impact your judgement. If we all look back, with honesty, at our investment decisions of years gone by how many of us have banked profits too early? How many of us have taken profits to offset losses? Surely, if you have found an investment which is profitable and has good potential for the future, why not retain it?
Difficult to take a loss
Whether we are following the crowd regarding investment trends or perhaps we have had an idea ourselves, admitting failure is difficult. On one side of the coin, you have to believe in your decisions and have confidence to see them through but on the other you also have to know when to admit defeat.
There will be very few people with property portfolios who have not retained an investment which they know they should have sold many years ago. Sometimes we fool ourselves into thinking” this investment will recover” while other times we believe we are right and the market is wrong. This is where we need a reality check, any investment market is simply an “information exchange” where all opinions and investment actions are considered and a trend created. If the market is moving against your initial thoughts and forecasts for the future then it is time to think again.
Getting emotionally attached
One of the worst things you can do when looking at a career in investment is to get emotionally attached to any particular investment or type of investment. At the least this will give you tunnel vision, and you may miss opportunities elsewhere, and at worst you will make mistakes. If you think of any investments whether property, shares, etc, as simply boxes which you’re looking to buy and sell for a profit, you won’t go far wrong. There is no room from emotional attachment if you’re looking to create a long-term stream of both capital gains and regular income.
While the idea of running your winners and cutting your losers makes perfect sense, why do so many people go the other way? There is a temptation to take profits too early as there is a temptation to retain underperforming assets and watch their value slowly diminish. All investors need to remain focused, review their investment positions on a regular basis and, above all, never be afraid to take a loss – and ensure you run your winners.