Author Topic: Should I bail on losing funds and lock in losses or hold on for the rebound?  (Read 6995 times)

Foundapenny

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OK, so I've been operating under Buffett's rule of "Never lose money" in this scenario, but I'd like to get some thoughts from the community.

About a year and a half ago, I rolled over a 401K from an old job into a tIRA, and the financial advisor I was using put me in several ETFs that he thought were going to do well over the long haul. Knowing what I know now, of course, I A) would not have used a financial advisor, and B) would have put the money into Vanguard index funds. But we can't change history, so it is what it is.

However, I now have both Roth and traditional IRAs with Betterment and have moved over some of the money that was tied up with the financial advisor over there. My problem is the funds that are remaining with the advisor aren't doing so well right now. I attached a screen shot of where they sit now. The number in the Notes field is how much they were worth in August of last year, right about the time I started considering moving to Betterment and coincidentally about the time the market took a dump and put me in this quandary.

Essentially, I have to sell these funds to roll over to Betterment, and in doing so I lock in these losses. Should I sell all of them and make the jump? Should I sell off the three that aren't too much in the red (but two are waaaaay below where they were in August) and move them over? Or should I can keep holding on to these and waiting for them to come back (however long that may be) to more like the August levels and pay whatever I'm paying in fees over the course of that time to stick it out?

I feel like the energy and pharm funds are just in a terrible spot right now, so it's not like I'm making an even trade by selling a severely depressed sector ETF and getting into an equally depressed total market index - the sectors are down more than the total market, so I'm giving up more in that respect. Or am I crazy?

Retire-Canada

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I faced a similar situation last year and this year. I decided to sell everything and buy according to my asset allocation. Holding onto investments for God knows how long until they recover just so you can sell them and buy what you really want to hold doesn't make sense to me. It's just a lesson learned and I'm happier to have moved on than to hold onto the past.

I'm in Canada so I'm not commenting on any tax implications that you may face just the general decision to hold onto losing past investments that don't align with your asset allocation and investment plan.
« Last Edit: March 24, 2016, 03:54:25 PM by Retire-Canada »

2Birds1Stone

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Get out now

slowsynapse

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My two cents is that you should be invested in the funds that offer you the best performance from today forward, net of some tax implication.  Let's say that you sell your current funds at a loss and essentially roll them over to a Betterment account.  Would a Betterment account offer you better upside (no pun intended) from this point forward than holding your EFT funds?  If the answer in your mind is yes, than you can  move without any worry and shouldn't have regret at future performance.  It looks to me like your advisor was trying to get you in to some "laggard" type investing.  This is not necessarily a bad theory of investing in my mind, but I think you need to have index funds as a very large percentage of your base.

PS, if you want to feel better about some losses, i can show you several individual whoppers in the energy sector that would make you feel better.

Heckler

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We had the same problem two years ago, so not quite as bad, but losses nonetheless.  We sold and bought our intended allocation of index funds.  Couldnt be happier. 

However, although $21k may be your life savings, it is a very small portion of your FIRE plan.  Thus you might hold them till recovery, but save 60% of todays income to your current AA plan, greatly surpassing the $21k in short time!

Spork

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Just for the sake of argument, let's say you have $50k worth of SomeFund.  You bought it for $70k 2 years ago.

The question you want to ask yourself is:  I have $50k.  Do I want to invest it in SomeFund?  Or do I want to invest it in something else?

That's always the question.  Worrying about what it looks like on paper right now is not the right question.  If SomeFund is a good investment now: leave it.  If it isn't: dump it.

GrowingTheGreen

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Just for the sake of argument, let's say you have $50k worth of SomeFund.  You bought it for $70k 2 years ago.

The question you want to ask yourself is:  I have $50k.  Do I want to invest it in SomeFund?  Or do I want to invest it in something else?

That's always the question.  Worrying about what it looks like on paper right now is not the right question.  If SomeFund is a good investment now: leave it.  If it isn't: dump it.

Love the way you explained it. Sunk costs are sunk costs.

I guess the only word of caution for OP would be this: something that may be temporarily be performing poorly is not necessarily a bad investment.

Foundapenny

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Good thoughts so far. Just for added context, the $21K isn't everything I have invested, so I'm not worried about it like it's my whole nest egg. But pulling out of the funds now turns paper losses of $3K-$5K (depending on whether you look at the purchase price losses or what they were worth in August) into real losses, and that's the better part of a year's IRA investment. The vast majority of my holdings are in Vanguard funds in my IRAs and my 401a.

brotatochip

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Your healthcare, pharmaceutical and energy ETF's will bounce back.  They all pay decent dividends and will rebound in time.  I say stay the course and hold them. 

MrMonkeyMustache

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Your healthcare, pharmaceutical and energy ETF's will bounce back.  They all pay decent dividends and will rebound in time.  I say stay the course and hold them.
Perhaps, but will they "bounce back" more than index funds during the same period?

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Foundapenny

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Just for the sake of argument, let's say you have $50k worth of SomeFund.  You bought it for $70k 2 years ago.

The question you want to ask yourself is:  I have $50k.  Do I want to invest it in SomeFund?  Or do I want to invest it in something else?

That's always the question.  Worrying about what it looks like on paper right now is not the right question.  If SomeFund is a good investment now: leave it.  If it isn't: dump it.

Love the way you explained it. Sunk costs are sunk costs.

I guess the only word of caution for OP would be this: something that may be temporarily be performing poorly is not necessarily a bad investment.

Agreed. I'm not looking to move my money out of the funds because I don't think they're worth the investment, but rather I don't want to be with the advisor any longer.

2Cent

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Just for the sake of argument, let's say you have $50k worth of SomeFund.  You bought it for $70k 2 years ago.

The question you want to ask yourself is:  I have $50k.  Do I want to invest it in SomeFund?  Or do I want to invest it in something else?

That's always the question.  Worrying about what it looks like on paper right now is not the right question.  If SomeFund is a good investment now: leave it.  If it isn't: dump it.
The problem with this kind of thinking is that people tend to find the current losing fund a bad investment and jump out when it's down, just before it goes back up. So you really can't trust your feelings for this.

Ofcourse if they charge fees that's another story.

Retire-Canada

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The problem with this kind of thinking is that people tend to find the current losing fund a bad investment and jump out when it's down, just before it goes back up. So you really can't trust your feelings for this.

This is why you need an investment plan you believe in. If the old investments fit into your plan you keep them and if they don't you sell them.

Spork

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The problem with this kind of thinking is that people tend to find the current losing fund a bad investment and jump out when it's down, just before it goes back up. So you really can't trust your feelings for this.

This is why you need an investment plan you believe in. If the old investments fit into your plan you keep them and if they don't you sell them.

Exactly.

This: This fund sucks, I am moving to this other one.  My research indicates it will work better.
Not this: OHMYGOD THE MARKET IS DOWN!  SELL!  SELL!  SELL!

Jack

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Agreed. I'm not looking to move my money out of the funds because I don't think they're worth the investment, but rather I don't want to be with the advisor any longer.

Ah, so it's not that you necessarily want to change investments, it's that you want to change accounts in order to ditch the advisor. In that case, to do that without "locking in the losses" you can either do a transfer-in-kind (if available, and if you like the expense ratios of your current funds) or sell, transfer the cash, and then buy similar funds (e.g. Vanguard sector indexes) on the other side. Doing the latter does mean "selling low," but you'd be buying equally low so it wouldn't matter.

capitalninja

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Couple things jumped out in this post.

First, 18 months is not "for the long haul". The funds you currently are in will come back. In fact if you'd bought into energy in Jan, Feb of this year, you'd be smiling right now.

Second, It's only ~21k so it's not like we're talking about your entire nest egg.

If you're not happy with the investments, simply don't put anymore money into them. Wait for them to bounce back (which they will) and then sell at that point if you wish. There's no point to locking in a loss now unless you have an investment where you KNOW the money will perform better. You don't want to fall into the trap of trying to capitalize hope. 

This investment will do better than my current one so I'm going to sell and put my money there. 

Unless you KNOW for a fact that the money would be put to better use elsewhere (like you're performing some type of arbitrage), then simply leave it alone. Doing nothing and simply putting your new investment dollars into your Betterment account (if that's where you faith currently resides) will be a less expensive route to take than throwing away 13% for no good reason other than Mr. Market isn't playing nice with your sectors of choice.

You're not going to see a near term recovery of 13% simply by moving your money to Betterment's portfolio; not any faster than if you'd simply left it where it currently is.

Foundapenny

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I guess I did a poor job of explaining my reason for this post. I'm done with my financial advisor and want to manage my money on my own. I won't get into all the reasons, but suffice it to say I don't think he's actually paying attention to my account. In order to do that, I have to sell the ETFs I'm in under his management in order to roll the funds over to Betterment, where I've got my IRAs parked. I'm a long-term investor forced into making a decision between selling at a loss so I can end the relationship with the financial advisor, or continuing the relationship for an unknown period of time to wait for the ETFs to come back and preserve capital. The current low share price on those funds isn't the reason I'm looking to sell, it's actually the reason I'm reluctant to sell because I know they'll come back up ... eventually.

After weighing the advice I've been given here, which has been very helpful on all counts, I'm thinking I'll get out of both First Trust ETFs at a fairly minor loss this coming week and move the $9K plus from that sale into Betterment. Then I'll hang tight on the other three for a little while and see what happens. At least then I have less tied up in funds that no longer fit my investment strategy. Then as each of those funds either comes closer to the break-even point, or in the case of Express Scripts hopefully closer to the price it was 8 months ago, I'll get out and then be fully out of the relationship with the financial advisor.

ulrichw

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[...] I'm a long-term investor forced into making a decision between selling at a loss so I can end the relationship with the financial advisor, or continuing the relationship for an unknown period of time to wait for the ETFs to come back and preserve capital. [...]

Please forgive me for being blunt, but this is completely wrong.

You're not locking anything in if you sell an asset at today's price and then buy the same asset again at today's price. All you're out is the transaction fees - where you end up is identical.

This can be extended (and is the principle of tax loss harvesting): If you sell an asset at today's price and buy an essentially equivalent asset at today's price, you are still in the same position (and you get to recognize the loss in the first asset this year).

So, sell away and buy again (at a new lower basis) in a different account - it makes no difference to your "capital."

BTW: There are all kinds of warning signs in your posts that you're using the wrong signals to decide to buy and sell. Statements like "as each of those funds [...] comes closer to the break-even point" are frightening. When you bought an investment should have nearly nothing to do with how good an investment is today. Whether you're in the black or the red should have nearly no influence on your decision to buy/sell/hold.

My recommendation is to cut your losses - become a Boglehead today. Unless you're a professional investor, it takes way too much time and effort to beat the market.

Metric Mouse

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[...] I'm a long-term investor forced into making a decision between selling at a loss so I can end the relationship with the financial advisor, or continuing the relationship for an unknown period of time to wait for the ETFs to come back and preserve capital. [...]

Please forgive me for being blunt, but this is completely wrong.

You're not locking anything in if you sell an asset at today's price and then buy the same asset again at today's price. All you're out is the transaction fees - where you end up is identical.

This can be extended (and is the principle of tax loss harvesting): If you sell an asset at today's price and buy an essentially equivalent asset at today's price, you are still in the same position (and you get to recognize the loss in the first asset this year).

So, sell away and buy again (at a new lower basis) in a different account - it makes no difference to your "capital."

.........

My recommendation is to cut your losses - become a Boglehead today. Unless you're a professional investor, it takes way too much time and effort to beat the market.

Well put. Selling $21k worth of shares to buy $21k worth of shares that you think will perform better is exactly the thing you should do.

powskier

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Can't you just transfer the shares as they are to whatever new brokerage account you create? You should'nt HAVE TO sell those shares.

It is easy for all of us to read these threads and converse with strangers and believe we are investing experts, clearly many of us have a lot to learn.

If I were you I would likely transfer those shares to my brokerage and let them sit until an upturn in those sectors. Going forward I would just invest in VTI and not worry about those ETF's. But I am just a stranger on the internet with a different mind, different goals, etc, etc.

FrugalFan

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[...] I'm a long-term investor forced into making a decision between selling at a loss so I can end the relationship with the financial advisor, or continuing the relationship for an unknown period of time to wait for the ETFs to come back and preserve capital. [...]

Please forgive me for being blunt, but this is completely wrong.

You're not locking anything in if you sell an asset at today's price and then buy the same asset again at today's price. All you're out is the transaction fees - where you end up is identical.

This can be extended (and is the principle of tax loss harvesting): If you sell an asset at today's price and buy an essentially equivalent asset at today's price, you are still in the same position (and you get to recognize the loss in the first asset this year).

So, sell away and buy again (at a new lower basis) in a different account - it makes no difference to your "capital."

BTW: There are all kinds of warning signs in your posts that you're using the wrong signals to decide to buy and sell. Statements like "as each of those funds [...] comes closer to the break-even point" are frightening. When you bought an investment should have nearly nothing to do with how good an investment is today. Whether you're in the black or the red should have nearly no influence on your decision to buy/sell/hold.

My recommendation is to cut your losses - become a Boglehead today. Unless you're a professional investor, it takes way too much time and effort to beat the market.

This is correct. You aren't locking in your losses if you are selling just to buy back in again. Locking in your losses would be selling and keeping the cash. You sound like you have a solid plan moving forward. I had to sell a bunch of things at a loss when I transferred from my advisor in the fall, but I did not lock in my losses because I just bought a bunch of index funds with that money as soon as the transfer went through.

Foundapenny

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[...] I'm a long-term investor forced into making a decision between selling at a loss so I can end the relationship with the financial advisor, or continuing the relationship for an unknown period of time to wait for the ETFs to come back and preserve capital. [...]

Please forgive me for being blunt, but this is completely wrong.

You're not locking anything in if you sell an asset at today's price and then buy the same asset again at today's price. All you're out is the transaction fees - where you end up is identical.

This can be extended (and is the principle of tax loss harvesting): If you sell an asset at today's price and buy an essentially equivalent asset at today's price, you are still in the same position (and you get to recognize the loss in the first asset this year).

So, sell away and buy again (at a new lower basis) in a different account - it makes no difference to your "capital."

BTW: There are all kinds of warning signs in your posts that you're using the wrong signals to decide to buy and sell. Statements like "as each of those funds [...] comes closer to the break-even point" are frightening. When you bought an investment should have nearly nothing to do with how good an investment is today. Whether you're in the black or the red should have nearly no influence on your decision to buy/sell/hold.

My recommendation is to cut your losses - become a Boglehead today. Unless you're a professional investor, it takes way too much time and effort to beat the market.

This is correct. You aren't locking in your losses if you are selling just to buy back in again. Locking in your losses would be selling and keeping the cash. You sound like you have a solid plan moving forward. I had to sell a bunch of things at a loss when I transferred from my advisor in the fall, but I did not lock in my losses because I just bought a bunch of index funds with that money as soon as the transfer went through.

I can't buy the same funds back in Betterment. Betterment doesn't offer the market universe; it only has six Vanguard stock ETFs. So yes, I am locking in losses if I sell.

For instance, when I bought the 53 XLE shares for $88.84 on Oct. 1, 2014, they were worth $4,708. If I had purchased VTI for $99.91 on that same day instead, I would have gotten 47 shares for the same price. If I sell 53 shares of XLE tomorrow at the going price of $61.79, I'll get $3,277. If i were to roll that over and purchase VTI with Betterment, I can get 31.7 shares. That's 16 shares fewer than if I had just purchased VTI in the first place. While VTI has increased 3.4% in value in that time, XLE has lost 30%.

Yes, if I could buy all those ETFs in the Betterment account, it would be a neutral trade. But I can't. I have to reallocate the cash I get out of my old account into the six Vanguard stock ETFs offered by Betterment. If I sell, I'm selling sector ETFs trading at four-year lows and buying into Vanguard broader market ETFs that are near historical highs. Yes, there's a degree of market timing in my sell strategy. Let's say XLE roars back to $85 a share on Oct. 1 and I decide that's close enough to sell and get out $4,500. It's entirely possible VTI has gone up as well, but I find it highly unlikely the entire market is going to gain 38% in unison.

Geekenstein

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FoundaPenny:

Ulrichw is right on this- your losses are what they are.  Selling and reinvesting the proceeds, whether in an identical fund or a different one doesn't change the net of the proceeds.  Neither does doing nothing, for that matter.  As others have said, you should be focused on your long term objective and getting your investments aligned with that objective.

Retire-Canada

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It's entirely possible VTI has gone up as well, but I find it highly unlikely the entire market is going to gain 38% in unison.

Sure, But XLE can continue to drag while VTI cranks along at 7-9% with dividend leaving you behind.

If you want XLE in you AA hold XLE or whatever sector ETF, but if the only reason you are keeping them is the hope they will roar back and then you can buy what you really want to hold.....that is not a great plan for the reasons pointed out in this thread.
« Last Edit: March 28, 2016, 09:15:38 AM by Retire-Canada »

ulrichw

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[...]
I can't buy the same funds back in Betterment. Betterment doesn't offer the market universe; it only has six Vanguard stock ETFs. So yes, I am locking in losses if I sell.
[...]

Ok, I didn't realize what Betterment offers, so I unfairly took you to task on the "locking in" statement.

I will still take you to task on the fundamental way you're approaching this. I will restate, as others have stated, that how much you're up or down is completely irrelevant to the sale. You shouldn't even be considering that.

In your OP you say "I feel like the energy and pharm funds are just in a terrible spot right now". If that's the case why would you want to be holding these funds?

On the other hand, you later imply that you feel they will outperform. If that's the case, then why are you thinking of selling any of them?

I think you're too fixated on your paper gains/losses.

If, as you said, these investments don't fit your current strategy, then it's simple - sell them; chalk up the losses to a learning experience and move on.

If, on the other hand, you think these funds are a "good buy" at today's prices, then hold on to them, and re-evaluate in a year's time.

Finally, if you want to be rid of your advisor, then just move the funds to a regular brokerage account. That'll give you the flexibility to keep or sell the shares when you feel it's right.

Also, if you're going to go to an index-fund-based strategy you may be better off saving the 0.15% that Betterment charges and doing it yourself. I doubt that the results will be very different.

The good news here is that you're learning some lessons before you have a huge amount of money at stake.

Jack

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I can't buy the same funds back in Betterment. Betterment doesn't offer the market universe; it only has six Vanguard stock ETFs. So yes, I am locking in losses if I sell.

Doesn't matter. The funds offered by the new brokerage don't have to be identical; they just need to be positively-correlated "enough."

And if the brokerage doesn't offer the funds you want, then maybe you should rethink the choice of brokerage.

ender

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Just for the sake of argument, let's say you have $50k worth of SomeFund.  You bought it for $70k 2 years ago.

The question you want to ask yourself is:  I have $50k.  Do I want to invest it in SomeFund?  Or do I want to invest it in something else?

That's always the question.  Worrying about what it looks like on paper right now is not the right question.  If SomeFund is a good investment now: leave it.  If it isn't: dump it.

Love the way you explained it. Sunk costs are sunk costs.

I guess the only word of caution for OP would be this: something that may be temporarily be performing poorly is not necessarily a bad investment.

It's better than this if you have them in taxable accounts, because sunk costs = sunk costs + tax loss harvesting :)