Let face it, paper losses are never good for any portfolio because it simply means that stocks were purchases at a bad time or a high price. Although that might be true most of the time, it is also possible to classify your paper losses into categories and benefit from it. In this post, we will be discussing types of paper losses and what we can do with them in your portfolio.

1. 5-15% paper losses

Small paper losses are usually caused by market fluctuations or cyclical price movements. As such, it is best to hold and accumulate if the market conditions are stable at the moment. In fact, such situations present opportunities to accumulate more stocks at a lower price. However, do take note of the percentage change between the stock you bought and the main index. This will provide some clues on how much of the price dip is caused by the current market weakness. This is especially common for bank stocks listed on STI because they are heavily weighted on STI. Therefore, when the stock you bought is moving in tandem with the index, then it means the dip is probably caused by market fluctuations rather than the company’s performance.

2. 16-30% paper losses

Usually, paper loss of this percentage means you have probably held too long or the company is facing challenges due to heightened competition in the market. Usually, when that happens, you can choose to either accumulate to average down on your average price and sell the later tranche at a profit to lower down the overall cost of the former tranche. Otherwise, you can also take note of subsequent dividend payouts to see if the company is confident about its future. Usually, if the company has already been paying insignificant dividends, then this stock is probably in trouble. Therefore, try and trade within consolidation zones and exit when you breakeven or at a small loss.

3. 30% or more paper losses

Looking at the recent market dive due to COVID, some stock counters on STI have fallen more than 30%. This includes defensive counters which are hard to predict or expect. In such cases, cutting losses or averaging down might not always be the best choice, however, you can consider putting those stock purchases into a “junk” category. This will alleviate your portfolio performance and treat those stocks as a slightly lower yield investment. The reason for such a classification is so that you can focus on higher-value purchases during the crisis. At the same time, these junk stocks can continue to provide periodic returns as rebates for your overpriced shares.

Closing thoughts

As oddly as it sounds, paper losses can sometimes present opportunities for investors. Using the suggestions listed above, investors will be equipped with realistic techniques on how to manage losses in different market situations. Also, do not always assume that price weaknesses equal to buying opportunities, sometimes it is important to differentiate a bargain or a low-value purchase. As mentioned in previous posts, investors should always stay reflexive in their strategies so that they can maximize their opportunity costs and minimize their losses.