DON’T GET EMOTIONAL ABOUT YOUR INHERITED STOCKS

When a new client who had recently received an inheritance opened up an account with me, he transferred this new portfolio from a well-known brokerage firm. After the transfer was completed, we sat down to review his current holdings and adjust the portfolio. Some of the client’s stocks were showing large losses. However, he explained that since he had received them as an inheritance, he felt awkward about selling them. He felt attached to them and didn’t think they should be sold. He then said he realized that such emotions were not a great way to base investments, and he decided to wait for them to move back up to the price for which his recently deceased father had bought them. Then, he would sell them.

This is a very common scenario. Children often refuse to make changes to a portfolio that they have received as an inheritance. Very often, this is due to sentimental reasons. In other cases, investors stick with a losing position for years in the hope that it will return to the original price they paid for it. As Rabbi Moskowitz, my high school Rabbi used to say, “Don’t let emotions get in the way of your thinking process.”

We All Make Mistakes

Sometimes you may have a little extra money at your disposal, and you decide to invest it. Maybe a friend gave you a handy stock tip, or you read about a company that sounded like an interesting prospect. After doing some research, you decide to invest in this company because it seems like an obvious winner. But when you receive your first statement, you see that the stock has dropped. So you decide to follow the policy of being patient. As time goes by, you keep checking, but the stock keeps dropping. Eventually, you become living proof of the old adage that patience is a virtue. The stock market may be moving up, but you are stuck with a loser.

In fact, chances are that if the stock starts dropping by 10, 15 or 30 percent, there could be problems with the company, and it may potentially pay to sell. However, many of us find it psychologically difficult to admit that we have picked the wrong stock. It’s hard for us to say that we made a mistake.

Opportunity Cost

Very often, the longer you hold onto an under-performer, the more money it costs. The reason for this is that the investor could have put his funds into something that actually made money. Therefore, stubbornly holding onto a losing stock will only cause financial harm to the investor. In economics, this situation is referred to as opportunity cost. Opportunity cost is defined as the cost of an alternative that must be forgone in order to pursue a certain action, or the benefits that could be received from taking an alternative action.

Profit from Losses

Some good can actually come from losing stock positions. When the position is sold, the investor realizes the loss, which may have certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, although they may not realize it, for many investors tax-loss selling may be the most important way to reduce their tax bill. If done correctly, it can save the investor money and help diversify the portfolio in various ways.

Working with licensed and experienced financial advisers can help you evaluate objectively whether you are holding bad positions. Many professional investors live by the credo that you should ride your winners and dump your losers. The reason is simple. There may be a reason why the stock is performing poorly, namely, that the company is not executing their business up to its potential. This indicates that is probably a good place for you, the investor, to avoid putting your hard-earned money.

There is a good chance that the relative that left the money for you as an inheritance would like you to gain from it. Speak with your financial adviser to see if your newly inherited portfolio matches your investment goals and needs and whether it is invested in an efficient manner.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il