Gyroscopic Investing

I frequently read people saying "but it's just a paper loss. I don't lose money if I don't sell."

That's like me saying that my foot got run over by a truck. I can't move it, and it's starting to get infected. But it's just a paper loss. I didnt lose the foot until I agree it's a loss and let the surgeon cut it off.

Then a week goes by and my foot starts to gangrene, and the veins on my leg are exhibiting signs of septic shock. BUT ITS A PAPER LOSS! I didnt cut the foot off yet, so I didnt lose my foot!

It's all part of the insanity of stay the course and expected returns. The stock market has become in the minds of some, a perpetual wealth generator/motion machine.

Okay, but aren't we supposed to keep the faith about the PP and stay the course?

Another one that gets under my skin are the people that say "My house is worth $500k, but because the market is slow so I can only sell it for $350k"

I just smile and don't say anything, but I'm really thinking "You obviously have no clue how markets work.  You're home is only worth what someone is willing to pay you for it, regardless of what you think it is worth, or how much you paid for it."

TripleB wrote: I frequently read people saying "but it's just a paper loss. I don't lose money if I don't sell."

Just ask them if they consider it a paper gain when they are up. 

longeyes wrote: Okay, but aren't we supposed to keep the faith about the PP and stay the course?

The PP doesn't dip like the stock market does, so there is no need to rationalize large PP losses.

If anything, paper losses should be looked at (all else being equal) as more worth selling than paper gains, considering the tax benefits.

MediumTex wrote:

longeyes wrote: Okay, but aren't we supposed to keep the faith about the PP and stay the course?

The PP doesn't dip like the stock market does, so there is no need to rationalize large PP losses.

Even if the PP dipped hugely you can bet that the stock market has imploded and is on fire. The reason myths pervade investing is because people have to rationalize pouring their retirement savings into fractional ownership of billion dollar companies that collapse if the wind changes direction.

Indices wrote: It's all part of the insanity of stay the course and expected returns.

Let me stick up for the "stay the course" folks.

I've known a number of people that freak when the market takes a big dive and start selling.  I have a friend that bought high and sold low at least half a dozen times in the wake of the 2008 financial crisis.  It was horrifying to hear about.  You need to have a plan that you can commit to, even when your cage gets rattled.

When we hit the next stock bull market, the Permanent Portfolio will lag one of these wild "95% stocks, 4% junk bonds, 1% REITs" portfolios.  I imagine we'll all need to remind ourselves to "stay the course" during those days.

LW,

I totally agree... you need to mentally prepare for volatility that's almost guaranteed to eventually come, and acknowledge that some of the market-moves are neither based on fundamentals nor permanant, a lot of the time.  I tend to really hate the term "paper losses", though, as it's often used by investment advisors charging a fee who didn't properly plan for their client or take their risk-tolerance into consideration, and try to keep them under their wing.  Much like the phrase, "You don't lose money until you sell."

I don't think the term "paper losses" serves to do much more than further distort the situation.  Understanding loss aversion and not succumbing to it is great... catch phrases to make up for mistakes and distorting the current value of your portfolio aren't so great... IMO at least.

moda0306 wrote: I don't think the term "paper losses" serves to do much more than further distort the situation.  Understanding loss aversion and not succumbing to it is great... catch phrases to make up for mistakes and distorting the current value of your portfolio aren't so great... IMO at least.

I agree, the term is often employed as a very handy cop-out!

Having said that, I subscribe to the Boglehead view that if you believed that the asset was worth purchasing even when its price was higher and you plan to hold it long-term, the day to day price movements are best not obsessed over.

I had a paper loss when I divorced my first wife.  I lost a lot of paper.