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I have some stocks that have done very poorly since I purchased them (to wit: CSCO, which is down 79% since I purchased it). I've hung on to them thinking I could recoup some of my losses over time.

However, I'm not so sure CSCO is going to recover anytime soon. With 10 years till retirement, what's the best thing to do? Do I 1) sell at its low and take the capital loss, buy something else, and hope to recover some of what I've lost -OR- 2) hang in there?

TIA for your thoughts, comments, and advice.


regards, redhed
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What type of investment strategy do you follow? Now is not the time to change strategy horses.

You were willing to buy CSCO when it was at $100/share and now want to sell it now that it dropped to $21/share? What stock are you thinking of replacing it with and why? Will CSCO go up almost 500% in ten years? I think it can.

My CSCO shares are down 20% which means they need to go up 25% for me to return to par. CSCO is my fifth worse stock this year. In fact, out of the 10 large cap growth stocks I own, only SUBX and JNJ are in positive territory. My MSFT, INTC, DELL, PFE, SGP, EBAY, and NOK shares are all down significantly.

Thank goodness I also own 10 lg cap value and 10 small cap GARP stocks. My lg cap value stocks are up and my small cap GARP stocks are WAY UP.
My best stock is TSCO which is up more than 65% YTD. My worst stock is NOK down 32% YTD.
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1) Why did you buy it in the first place?

2) Are the reasons you bought it still true?

3) When you say that you are not sure that it is going to recover anytime soon, is this based on some analysis, or is it "just a feeling"?

4) How much of the stock do you have? What percentage of your portfolio? What else do you have?

Not enough information here to give meaningful advice, other than this: Holding onto a dog hoping it's going to turn into a silk purse (to mix metaphors) is not a wise course of action IMHO. Any loss you take on CSCO could be used to offset capital gains elsewhere in your portfolio, if it is time to rebalance by selling some of your winners.

Thanks!
Joe
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if it is time to rebalance by selling some of your winners.

And I would ask if this has happened. I havent been investing long but it was my understanding that at least every year or two, one should do a port overhaul and rebalance(with an eye towards long term cap gains and taxes) so that if there is a bleed in the port, you can stop it. Was this wrong?

magique
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I recommend a rebalance every 18 months or so. More often than that, and you may be running up costs/taxes unnecessarily. Less often, and your original asset allocation will probably have changed dramatically.
You don't want this to happen unless your goals and risk tolerance have changed. Many experts opine that correct asset allocation is the most important factor in investment success.

If you originally decided a mix of, say, 70% stocks/20% bonds/10% cash was consistent with your goals/risk tolerance, then you want to stick with that. Since stocks will normally outperform bonds and cash, stocks are gradually going to consume a higher percentage of your portfolio. Since stocks' greater returns are predicated on higher risk, you are increasing your risk over what you originally decided it should be, if you are not rebalancing regularly.

As to keeping an eye out for taxes, two strategies to use are: 1) rebalance by putting new money into the underfunded categories, rather than selling your winners, and 2) if you do sell some winners, you may also want to sell some losers to offset your capital gains.

Thanks!
Joe
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Thanks Joe, kinda synopsized and clarified a lot of whirling dervish kind of thoughts that I was having. You explained one thing that I wasnt sure of. Why everyone kept talking about the importance of rebalancing. But till now, no one ever said WHY you did that. It has to do with goals and risk tolerance. Simple and straight forward. I am learning pretty rapidly but still have SO much to learn. Sometimes in the face of a bit of low grade resistance from my family( but I have noticed that they usually dont mind helping enjoy the benefits of my new "hobby" when the benefits are reaped....ROFL).

Thanks again,
Magique Darkayne
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FWIW, CSCO was one of the recent "losers" in my annual portfolio re-balance. As hard as it was to do it, I went with the "If you were buying with new money today, would you ever buy this stock?" approach. I wouldn't, so I ditched it in favor of another. "Dear John, it's very difficult for me to write this note to you. I feel brief is probably best, so I'll just say it: I've met another ticker, and we're in love."

Sigh. Hurts to sell something at a loss, but then again, at least I don't have to deal with the weekly annoyance of watching it sputter around at (for me) a 65% loss...

Onward!
Tamarian
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As hard as it was to do it, I went with the "If you were buying with new money today, would you ever buy this stock?" approach. I wouldn't, so I ditched it in favor of another.

That should be the ONLY approach. If you don't like the company's chances anymore, sell it (take the CG loss if you qualify, but don't let the absence of that stop you) and buy something you believe in.

Now, say you do still believe in the stock. THEN it would be more beneficial to keep your devalued shares, because from this point forward you would be better off making that money back, than an equal amount back on a new stock (which you'll owe capital gains on.)

It all comes down to believing in the stock, NOT holding on because you can't stand to admit you were wrong.

- Tom
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If you have capital gains to offset, I'd always say it's a no-regrets move to take as big a capital loss as you have in Cisco. If you want to hold your position in CSCO, you can do one of two things, depending on your short-term time horizon:

(1) Sell your position in CSCO and re-buy it after 30 days.
(2) Buy an equal number of shares as you currently own in CSCO, and sell your current shares in 30 days to realize the loss (this requires some cash and/or liquidity, but note that you should be able to borrow the money, at today's low rates, and deduct the interest paid from your taxes (assuming it doesn't exceed your total investment income in 2002)).

I won't advocate which is better between 1 & 2, as I think short-term forecasting is very difficult, to say the least. But I wanted to note that you do have the option of taking either up- or downside risk over the 30 days. And you may want to spread your sales out over time to mitigate against short-term price movements.

I followed both options last year, taking losses in some of my large-cap tech holdings (e.g., LU, SUNW, CSCO, ORCL, YHOO) to offset gains realized elsewhere. With a couple exceptions (in which I decided not to re-buy), I hold the same positions today that I held then, and I didn't lose on any of these (but you can -- like the Rule Breaker portfolio when taking its tax loss on HGSI).

IMPORTANT NOTE: If you don't have/expect enough capital gains to offset the overall capital loss that you will realize in CSCO, don't sell any more than you'll be able to offset, unless you have a new opinion of CSCO (I'd go to that message board for advice on that stock). There's no point in loaning the government your money (indeed, for that reason, many people hold off on realizing these losses until the fall).
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ROFL Tam. Loved that dear John letter. So far havent really had such an experience(my worst was buying Merck at 58)and avoided the .com stocks entirely until picking up a share of microsoft for the 14 year old at his insistence. But it is a good case in point. grin

Magique
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