Wall Street Steward Blog

Biggest Investment Misconception



Hello everyone. Welcome back to wallstreetsteward.com. My name is Matt Griffin and today’s entry is about one of the biggest pet peeves I have in the financial industry.

The biggest pet peeve I have in the financial industry is the statement “I haven’t lost until I sell.” This comes up all the time in speaking with clients, or prospects, or acquaintances. They’ll say things like, “Yes, I’ve lost 20%. I’ve lost 30%. I’ve lost 50%. But, I haven’t lost until I sell.”

Folks, let get over this real quickly, this idea that you haven’t lost money until you sell. I know it’s been a go-to statement for brokers for the past 20 years. Which is, “Mr. Jones you’re buying more shares at the cheaper price, once it’s dropped 30-40%. So, you’re acquiring more shares so when it comes back, you’re going to make your money back. So, you haven’t lost until you sell.”

Let’s separate ourselves from the financial services business for just a second. Think with me for a minute. If you were to go apply for a mortgage and you sat down in front of the loan officer. And, the person asks for your 1040’s and they ask for your brokerage statements and they ask for all of your financials that go into getting a mortgage. And, you tell them Mrs. Mortgage Broker, I know my financial statement only says that I have $100,000 in that account, but that account used to be $1,000,000. So, I’d like you to value that as if it was $1,000,000 when you’re determining how much to give me for a mortgage. The mortgage person would laugh at you folks. They’re not going to value it at what it used to be. Whether or not you still own the still securities makes no difference. If the account has gone down, whether or not you realize that loss, whether or not you sell, you have lost money. Ok? If you put together a net worth statement and you have all of your assets on one side and all of your liabilities on the other side of the page. Well, folks, your net worth has changed if the account has gone down in value. Again, you have lost money whether or not you realize the loss.

I’m not sure exactly where the statement came from. Maybe it was a super broker back in the 50’s and 60’s who thought up this statement and used it with clients to maybe not do the work or to be a little bit lazy. I’m not sure exactly. However, if you just think about it logically, Mr. Jones I know you lost $20,000. You know you invest $40,000 and it’s worth $20,000, so you’re accounts gone down $20,000, but you really haven’t lost until you sell. I mean, what is that? Some sort of a veil comes down over the investor’s eyes? I mean, someone would have to be an idiot to fall for that.

That being said, it’s a personal opinion of mine. I think it’s a disservice that people in our industry do when they tell investors that. And investors just accept it, just blindly accept it. “Well, I haven’t lost money until I sell. It’s just a paper loss right now.” Yes, Mr. Jones, you have not realized the loss, but if the account went down, you lost money. Period.

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Thank you very much for listening. I’ll see you next time.