Ever held on to thator a scheme or even a plot of land or an apartment bought as an for years despite the losses that are staring back at you? There is always hope when it comes to a loss-making , that it will bounce back. But will it?
In the wait for your loss-makingto turn in a profit, are you letting go of opportunities that can help you generate gains? If you find this resonating with how you manage your own , know that you are not alone.
Behaviour specialists and psychologists have explained in various research over the years that for the human mind, pain of losing something overshadows the joy of gaining. Thus, a loss of Rs 10,000 will hurt you at least twice as much compared to the joy a windfall gain of Rs 10,000 brings to you.
When it comes to your, this behaviour might compel you to remain with a loss-making as you continue to hope that the price will turn when you do finally sell it, rather than using whatever you get by selling it, even if at a loss, and re- the amount in a potentially profitable alternative.
Holding on to these losses, if indeed it is a poor-quality investment, can only make you lose more as time moves forward. Chances are you will keep hoping but will not regain the capital you spent on the investment.
This behaviour is called loss aversion.
The dangers of loss aversion
If you are inclined to loss aversion, then chances are that you will be quick to sellwhich are profitable while holding on to the loss-makers. This only means that you are letting go of good quality in favour of keeping something that is not working out as expected, hence, letting go of potential future gains.
Anis profitable in the long run if it has good value and by selling that over a loss-making one may come naturally to you but is counter-intuitive to the basics of having a good quality . As an extreme, if you sell all your good quality holdings, what you are left with is losses and uncertainty.
Holding on to these losses, if indeed it is a poor-quality, can only make you lose more as time moves forward. Chances are you will keep hoping but will not regain the capital you spent on the .
How to avoid loss aversion?
Specialists advocate looking atin entirety rather than as individual cases. For example, if the small property you invested in is not generating any income, you may feel you have to work hard to get a rental while being unwilling to sell at a value below cost.
However, if you put this loss-makingas part of your entire which includes , bonds, and so on, you may find that eliminating this long-term and reinvesting in a better alternative will in fact boost net gains in the going forward.
Focus on your good qualityand take this time to get rid of what is pulling your return down. However, keep in mind, when we speak of not falling prey to loss aversion, it is always about long term returns; volatility is a given in the short and very near-term period.