We all have them -- those pesky investments bleeding red in our brokerage accounts. They just sit there day in and day out, regularly underperforming the market. Everyone in the investment world loves to discuss their winners, but no one wants to discuss their losers. In fact, newer investors frequently get stuck holding disappointing stocks for far too long because they don't know when to cut their losses. Here is a surefire plan to turn a losing investment into a winning one.
The first thing you need to know is that we all have plenty of underperforming stocks in our track records. No one bats a thousand and that's okay; in fact, it's to be expected! Bad investments are a part of every investor's track record, but thankfully, as long as you didn't borrow any money to invest, the most you can lose is 100%.
As daunting as that sounds, remember that the upside is unlimited when investing in stocks for the long term. This means that it only takes one solid winner to wipe out a lifetime of losing investments.
2. Assess your holdings
Bad investments don't make you a bad investor. We often learn the most from our worst investments. The trouble comes when you don't learn from your mistakes. Take a beat and look through your holdings. Why is that investment a loser so far? Is the underperformance a temporary setback or is it more pervasive to the company as a whole? Most importantly, ask yourself: Am I making this mistake elsewhere in my portfolio?
For example, a long-term loser I've had on my scorecard is Ford (F -1.56%). Over the years I've owned it, Ford is down around 34% compared to the market's gain of 91% (including dividends). I initially invested in Ford as a potential long-term value play based on a successful turnaround. In fact, over the years, I continued to invest more and more of my capital into the Blue Oval in a race to the bottom.
Since then, I've checked through my portfolio for similar mistakes: Are any more of my investments based solely on a turnaround? Am I overexposed to the auto sector? Is there anywhere else that my capital may be better deployed?
3. Don't double down
If a company doesn't pass your assessment, there's no need to sell out -- but don't add more. It can be painful to throw in the towel on an investment, but try to separate emotion out as much as you can. Many investors feel a need to double down on a losing stock, but you should resist this urge. Many times, a correction in a company's price is temporary, but a long-term pattern of disappointment is different. When a company is fundamentally flawed, its returns are often not worth the time it takes to turn around. Don't make the mistake of throwing more good money after bad.
Take Amazon (AMZN -1.44%) as an example. Its stock has experienced price corrections that are frequent and quite large. Despite these drops, Amazon continues to stomp the market year after year. The difference between an Amazon and a Ford is a long-term pattern of successful business growth. This has pushed Amazon to new heights and kept Ford's best days in the rearview.
4. Add to your winners?
The most surefire way to turn a losing investment into a winner is to put that dry powder toward the leaders, rather than the losers, in your portfolio. In the words of Fool co-founder David Gardner, "Winners win." This is exactly why the best investment with your newly free capital may just be a stock you already own.
Many investors get so wrapped up in the excitement of owning many different companies that they overlook their existing winners. Just because you already hold a company doesn't mean you can't invest more into it. The company in your portfolio with a history of outperformance is often a great place to invest. A market-beating track record doesn't happen by accident, after all, and another great company can be hard to find. As long as your position size is within your comfort zone, the winners in your portfolio should frequently be at the top of your shopping list.