This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Not every investment works out well. Read on to see why one mistake could cause you to get stuck with a losing investment.
Image source: Getty Images
Ask anyone who’s been investing money for years, and they’ll probably tell you that their track record isn’t perfect. Rather, many of us inevitably wind up with a bum investment in our brokerage accounts or IRAs here and there for different reasons.
A given company could easily start strong — only to fall victim to poor management or market circumstances through the years, leading to a lower share price. And you shouldn’t necessarily beat yourself up every time an investment of yours doesn’t work out well.
On the other hand, you may wind up with a poor investment in your portfolio due to not taking the time to vet it properly. And that’s a more avoidable scenario.
Always do your research
In a recent Schwab survey, 16% said that careful research contributed to their most successful investment. On the other hand, for 20% of respondents, a lack of research is what led to their least successful investment.
What this tells us is that it’s important to take the time to research stocks before adding them to your portfolio — and to continue researching them once they’re in your portfolio. You can go about this in a few different ways.
First of all, publicly traded companies are required to disclose certain financial information at regular intervals. So it’s a good idea to pay attention to cash flow and debt. If a given company seems to be burning through cash at a rapid clip and consistently increasing its debt load, it’s a sign it may not be on the best path.
Another factor to look at? A given company’s management team. What experience does that leadership team bring to the table? Has a volatile personality joined the mix with the potential to drag the company down? These are important questions to ask yourself.
Another good way to vet a company is to listen to its earnings calls every quarter — or read a transcript after the fact. You can often find this information in the investor relations section of a company’s website.
How to make the best of a bum investment
If a lack of research has caused you to get stuck with a less-than-stellar investment, the good news is that you now know how to avoid a repeat. But also, you may be able to use a poorly performing stock to your advantage.
If you think a given stock of yours that’s lost value has no chance of recovering, you can sell it at a loss and use that loss to offset capital gains in your portfolio. So let’s say you stand to lose $4,000 on a stock, but also recently made $4,000 by selling other assets in your portfolio at a profit. That loss would offset that gain, wiping out your tax liability.
You should also know that if you don’t have gains to offset, you can use up to $3,000 of investment losses to cancel out that much ordinary income. So if you have at least one underforming investment in your portfolio, you may want to sit down with a tax professional and see if selling it makes sense.
Our best stock brokers
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
