Hidden Assets: Sell lousy investments
The sooner you admit the mistake and dump the loser, the sooner you can add better investments to your portfolio.
(MONEY Magazine) -- A Nobel Prize in economics and numerous tenured college positions have been granted for the study of how hard it is to break up with a bad investment. The highfalutin academic theories are typically riffs on the basic emotions of remorse and denial.
Knowing that you could have bailed out of a loser at a higher price is what often keeps you attached. "All it takes is the realization that 'had I acted, then I would have been better off'" to paralyze us, says Orit Tykocinski, an economics professor at Ben Gurion University who has studied "inertia inaction."
Or maybe you're an honors student of the I Deserve to Break Even school of investing. You insist that the Amazon shares you bought at $106 in 1999 will rocket back from today's $36 so you can exit with your pride and portfolio intact.
Former winning investments are another common weak spot, especially if you're still sitting on a gain. Just because Money Magazine touted a mutual fund back in the day - PBHG Growth, Janus Worldwide, anyone? - doesn't mean it was a lifetime recommendation. A loss of performance mojo, managerial musical chairs or a merger with another fund are all strong signs that it's time for you to make a fresh start.
Take a look at every dud investment you own and ask yourself why you still own it. You are not allowed to factor the purchase price and the long-ago value into your answer.
All that matters is what you can rationally expect in the future. If it isn't a good investment, sell. Period. No more excuses. Get out and reinvest in a stock or fund with better prospects. Every month that you wallow in what used to be, you are squandering the opportunity to have your money do more for you elsewhere.
If that means selling for a loss, remember that Uncle Sam is standing by with a silver lining: You can deduct losses on your tax return (first against capital gains, then up to $3,000 in ordinary income).
If you still have a profit on a long-term holding that has simply lost steam, don't hold on just to ward off a tax bill. With the top long-term cap-gains rate at 15 percent, you're not likely looking at a huge hit.
It'll be a small price to pay for crossing one more entry off your to-do list.
7 Steps to Uncover Hidden Assets: