What Is a Financial Advisor & What Do They Do?

Financial advisors help you create a plan for meeting your financial goals & guide your progress along the way. They can help you save more, invest wisely or reduce debt.

A financial advisor offers assistance with/or, in some cases, complete management of your finances. The catch all term “financial advisor” is used to describe a wide variety of people & services, including investment managers, financial consultants & financial planners. A financial advisor can also be a digital investment management service called a robo-advisor.

What do financial advisors do?

The services provided by financial advisors will vary based on the type of advisor, but generally speaking, a financial advisor will assess your current financial situation, including your assets, debts, expenses & identify areas for improvement.

A good financial advisor will ask you about your goals & create a plan to help you reach them. That may mean calculating how much you should save for retirement, making sure you have an adequate emergency fund, offering tax-planning suggestions or helping you refinance or pay off debt. Financial advisors also help invest your money, either by recommending specific investments or providing complete investment management.

In some cases, you can choose which services you want or need based on the type of advisor you select. For example, a traditional in-person advisor will likely offer personalized, hands-on guidance for an ongoing fee. A robo-advisor is a low-cost, automated portfolio management service, typically best for those who want help managing their investments. Then there are online financial planning services, which marry the lower costs of a robo-advisor with the holistic guidance of a human advisor.

    Do you need a financial advisor?

    If you’re struggling to prioritize your financial goals, need a plan for where & how to save, or want help with investment management, you may want to work with a financial advisor.

    Financial advisors bring an expert and outside view to your finances, take a holistic look at your situation & suggest improvements. 

    Financial advisors also can help you navigate complex financial matters such as taxes, estate planning and paying down debt.

 

Is a financial advisor worth it?

    A good financial advisor or robo-advisor can be worth the cost if you’re able to save more money, cut your expenses or better plan for the future. 

    A financial advisor can also help you feel more secure in your financial situation, which can be priceless.

    But financial advisors can also come with high fees. Depending on the type of advisor you choose, you might pay anywhere from 0.25% to 1% of your balance each year. 

    Some advisors charge a flat fee to create a financial plan, or an hourly, monthly or annual rate.

 Below, an overview of each type of financial advisor and what they do:

1.      Robo-Advisors:

        If you’re looking to invest for retirement or another goal, a robo-advisor can be a great solution. 

        They’re almost always the lowest-cost option & their computer algorithms will set up & manage an investment portfolio for you. 

        You’re probably a good candidate for a robo-advisor if:

        o   You need to save for retirement but aren’t sure where to begin.

        o   You want to benefit from stock market returns but don’t have a lot of time to learn how to invest.

        o   You have a lump sum you want to invest for one or more future financial goals.

        o   You don’t have much money to invest yet robo-advisors typically have low or no-account minimums.

    

    Here’s what to expect from a robo-advisor:

• Your first interaction will most likely be a questionnaire from the company you’ve selected as your provider. The questions help identify your goals, investing preferences & risk tolerance.
• Based on the information you provide, the robo-advisor’s algorithm will recommend an investment portfolio that’s typically built using low-cost exchange-traded funds & index funds.
• The service will then provide ongoing investment management, automatically rebalancing your investments as needed & taking steps to reduce your investment tax bill.
• The low-cost, easy-entry nature of robo-advisors makes them a good choice for many consumers.

2.      Online Financial Planning Services:

    Online financial planning services offer investment management combined with virtual financial planning. 

    The cost is higher than you’ll pay for a robo-advisor, but lower than you’d pay a traditional financial advisor.

    Consider an online financial planning service if:

o       You want to work with a human advisor, but you don’t mind meeting that advisor by phone or video. 

o       You’ll save money by meeting virtually but still receive investment management and a holistic, personalized financial plan.

o       You want to choose which financial advice you receive. Some services charge a flat fee based on the complexity of the advice you need (Investment management is included). Others charge a fee for investment management & offer a la carte planning sessions with an advisor.

o       For many people, this model is the right fit as it combines lower costs with a high level of service.

        

        Here’s what to expect from an online planning service: 

• Some services function like hybrid robo-advisors. Your investments are managed by computer algorithms, but you’ll have access to a team of financial advisors who can answer your specific financial planning questions. 
• At the other end of the spectrum are holistic services that pair each client with a dedicated CFP, a highly credentialed expert. 
• Either way, you should receive investment management and personalized financial guidance to help you meet your goals.

3.      Traditional in-person financial advisors:

 In addition to robo-advisors & online planning services, the term “financial advisor” can refer to people with a variety of designations, including:

1. CFP: Provides financial planning advice. To use the CFP designation from the Certified Financial Planner Board of Standards, an advisor must complete a lengthy education requirement, pass a stringent test & demonstrate work experience. 
2. Broker or Stockbroker: Buys & sells financial products on behalf of clients in exchange for a fee, commission or both. Must pass exams & register with the SEBI. 
3. Registered Investment Advisor: Provides advice and makes recommendations in exchange for a fee. RIAs are registered with the SEBI (Investment Advisors). Some focus on investment portfolios, others take a more holistic, financial planning approach. 
4. Wealth managers: Wealth management services typically concentrate on clients with a high net worth & provide holistic financial management.  
5. Human financial advisors generally cost more than robo-advisors & online services & may have minimum investment requirements in some cases. But you may decide to go for it if: 
• If you’re undergoing or planning a big life change, such as getting married or divorced, having a baby, buying a house, taking care of aging parents or starting a business. 
• Your investments have grown or your financial life has gain complexity beyond what a robo-advisor or online advisor can handle. 
• You want to meet with someone in person & willing to pay more to do so. 
• Here’s what to expect from a traditional in person financial advisor. 
• You’ll likely meet in person at his or your local office/home
• The advisor will provide holistic planning & assistance to help you achieve financial goals
• You’ll have in-depth conversations about your finances, short & long-term goals, existing investments & tolerance for investing risk, among other topics
• Advisor will work with you to create a plan tailored to your needs i.e.  retirement planning, investment help, insurance coverage, etc.
• Hire an advisor you’ll be comfortable working with &  of course, one who’s is qualified or experienced, meaning she’s required to put your interests first.

Mr. Buffet's 2020 AGM-Key Extracts

Mr. Buffet's AGM's is always an inspiration was as 5 hours event in 2020, but of absolute blissfulness. The ghost of speculations runs-away whenever you listen to Warren Buffet . 
Its also the first time Mr. Buffet used PPT in his whole career & kicks off the meeting by saying "who says you can't teach old dog new tricks!". The key takeaways from the AGM were :

1. Great depression, forced many people to loose faith in market - DJIA (Dow Jones Industrial Average) was at 381 points (In Sept, 1929) & after 3 months it fell 48% to 198. All so-called smart-fund-managers said "you never want a serious crisis to go to waste". Then after another 10 months (August 1929) market went up 20% (To 240 points) from 1929 low  & then there was a long-long great-depression for 20 years. (In 1932 DJIA went to 41 points!, while in Jan 1951 it reached 240 points).
2. Still as a country US,  endured, persevered & prospered - Today DJIAis above 24,000 points. This reminds of Mr. Taleb's anti-fragile lesson,  human-beings are most anti-fragile species (Things that gain from dis-order, which always comes back more strongly) amongst all .
3. You can't time the market - Impact of COVID is uncertain nobody can time the market (Nobody in 1929 could have predicted 20 years of market reaching no-where). Historically there were several instances of shutting down of markets (In 1924 for 4 months, after 9/11 for 4 days). COVID brings unique uncertainty on the table. No body knows if the second attack is on the offing (During winters) & how will that impact the market. People have different fear quotient (Fear Psychosis) & should accordingly take positions (Wait or take plunge) in current market. 
4. Farm example - If you own a farmland & the owner next to you keeps asking you to buy your farm or sell his on daily basis, that's ridiculous. You are not obliged to listen to this guy.  Man people take advantage of you by telling you that they know how much this farm would produce tomorrow, day-after, next year etc & hence inducing you to buy/sell. If there is no change in fundamental business pre-post COVID, one should not sell one's stocks. Outsmarting advisors or other people in the industry is not the right approach for investing. 
5. 40% cash position - Buffet has not taken plunge (To buy) in the current market as he says he is always prepared for the worst time (Both for himself along with his insurers). Being hyper-conservative & hyper-aggressive is reflective of Buffet's investment style. Mother nature & Gods are also hyper-conservative. Please note we humans have 2 eyes, 2 ears, 2 hands etc Any fund-manager in the name of optimization would have negotiated with the almighty for nothing more than 1 of each!...this is my view.
6. On Swelling of Fed Balance Sheet - Its better that Fed should swell it further, as we know the consequences if they don't do it while the consequences of doing it is not as harmful. Trick is to keep borrowing in own currency (As you can thus never default) as debt is not re-paid but just refunded. 
7. Negative interest rate makes the float from insurance premium to Berkshire inferior?? - Buffet says if companies are able to do what they were doing before interest rates were positive there is no need to worry to much about negative interest rate.
8. Companies that require less capital to offer same or higher growth are best companies to stay invested
9. Getting-real-rich (super returns) is different from staying-real-rich (decent returns) - Capital preservation is more important hence one should not get distracted by super-returns. 
10. On share buybacks - It should be not only price-sensitive but also need-sensitive (If any owner wants cash for his shares, assuming it's a significant chunk, companies can always buy-back his shares). There is a risk of buying back at slightly/moderately expensive valuation, but this risk is present when you do acquisitions. 
11. It's easy and more re-warding to sell money (as a commodity) than managing it - Index funds which earn less fees are never pushed to investors. 
12. Buying stocks of oil companies are equivalent of taking bet on oil prices - Mr. Buffet says there is a risk of permanent capital loss for oil companies. 
13. Air line industries - Sold of all the stake, Mr. buffet says he made a mistake by buying airline stocks as the future of this industry is much less clear. 
1. Don't know how many passengers will fly after the COVID impact 2-3 years down the line.
2. It’s a tough business as one small mistake puts life of so many people in danger. 
3. Also the reputation of company is endangered. 
4. Oversupply of planes will also have pressure on pricing power. 
5. Industry is highly capital intensive & over-dependance on borrowing is high. 

EPF Rate Announcement for FY 2019-20

Post Central Board of Trustees (CBT) meet on 5th March.'20, Employees Provident Fund Organisation (EPFO) has revised Rate of Interest (ROI) to 8.50% for FY19-20 from PY18-19 of 8.65%. This marks a 15 basis points cut from the previous year.

Movement of EFP Rate of interest announcements & movement from FY12-13 to FY19-20.

Financial Year	EPF Interest Rates
FY 2019-20	8.50%
FY 2018-19	8.65%
FY 2017-18	8.55%
FY 2016-17	8.65%
FY 2015-16	8.80%
FY 2014-15	8.75%
FY 2013-14	8.75%
FY 2012-13	8.50%

Cut in ROI is due to lower earnings from exposure in debt investments in some troubled companies.  EPFO has over 4,500 crores debt exposure in DHFL & IL&FS. Even at current rate, EPF ROI is better than some govt scheme (like post office savings, PPF etc) or bank FD investments, as it comes tax free at all stages. EPFO has over 60 million active subscribers.

Finance Ministry had earlier advised Labour Ministry to align EPF rates with other govt run scheme. As GOI stand guarantor, finance ministry vets EPF rate proposal to avoid additional liability on account of shortfall in EPFO income vs interest outgo for current Financial Year.

Why need for Personal Financial Planning??

Why the need for personal financial planning??

Personal financial planning helps you determine your short & long-term financial goals. It helps to create a tentative plan to meet those goals. The first step in developing your personal financial plan is to meet with a financial advisor.

Ø  Income: It's possible to manage income more effectively through financial planning. Managing income helps you understand how much money you'll need to pay for annual taxes, other household monthly expenditures & balance amount as savings. 

Ø  Cash Flow: Increase cash flows by carefully monitoring & managing your spending patterns & expenses. Tax planning, prudent spending & careful budgeting helps you keep more of your hard earned cash.

Ø  Capital: An increase in cash flow, can lead to an increase in capital. Allowing you to consider investments to improve your overall financial well-being. 

Ø  Family Security: Providing for your family's financial security is an important part of the financial planning process. Having the proper adequate life insurance coverage (preferably a term policy), medical insurance & home loan coverage policies etc in place can provide peace of mind for you & your loved ones. In case of all policies please maintain adequate files, which is known to spouse or other family members to track in case of any untoward incidents where these needs to be claimed.

Ø  Investment: A proper & flexible financial plan considers your personal circumstances, objectives & risk tolerance. It acts as a guide in helping choose the right types of investments to fit your various needs based on your life cycle, personality & future goals. 

Ø  Standard of Living: The savings created from good planning can prove beneficial in difficult times. You can make sure there is enough investment cover to replace any lost income should a family bread winner become unable to work. 

Ø  Financial Understanding: Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood & results reviewed. Giving you a whole new approach to your budget & improving control over your financial lifestyle. 

Ø  Assets: A nice cushion in the form of assets is desirable e.g. 2nd house, freehold land, gold etc. Many assets currently come with liabilities attached.  It becomes important to determine the real value of an asset i.e. realizable value of asset after setting of attached liabilities. Knowledge of settling or cancelling the liabilities, comes with the understanding of your finances. The overall process helps build assets that don't become a burden in the future. 

Ø  Savings: It used to be called saving for the rainy day. Sudden financial changes can still throw you off track. It is good to have some investments with high liquidity in bank under fixed deposits. Liquidity investments should be able to take care for 6 months in case of loss or income. These investments can be utilized in times of emergency or for educational purposes. 

Ø  Ongoing Advice: Establishing a relationship with your financial advisor who you can trust & relate with is critical to achieving your goals. You should regularly meet your advisor maybe once in 6 months to assess your current financial position & develop & modify you financial plan based on your changed needs.

Why consider ELSS while tax planning in current year

Only a few months or rather 2 months or 62 days remain till you can plan well & invest your hard money to save tax. That's right, if you want to save tax this year, invest in some of the tax saving schemes available in the market. If you do not invest properly in tax saving schemes, TDS will be deducted from your hard-earned money/salary for which you grind every day, for the entire year. This is a heartbreak that most salaried individuals face at the end of every financial year.

Most people who want to save tax, look for a way out from this & take help of different tax savings investment opportunities. Some of the most popular Investment options that most salaried individual look to & how they compare against ELSS. Investment in any tax saving scheme should serve the basic purpose of saving the tax & also at the same time, help in creating wealth for the future with a lower lock-in period. Unfortunately, that is not the case with most of these investments.

Investing in these options achieve a mini-goal of saving tax. But returns on these investments are so low that it hardly is able to reach the inflation levels of our country, let alone beating the inflation rate even after a lock-in period of 5 to 15 years. 

Investing in ELSS Mutual Funds provide you with the opportunity of saving tax upto Rs.46,800/- & also create true wealth in the long run. The returns you get by investing in ELSS is much more than that of other tax saving schemes & also beats the inflation by a fair margin with a lock-in period of just 3 years.

.

By looking at the numbers in the below table, it is clear that the only investment that helps you achieve both these goals in the most efficient manner is ELSS.

Investment Nature	Expected Returns	Lock-In Period
National Pension Scheme (NPS)	12-14%	Till Retirement
Unit Linked Insurance Plans (ULIP’s)	According to Plan	5 Years
Public Providend Fund (PPF)	7-8%	15 Years
Sukanya Samriddhi Yogana	8-9%	N.A.
National Savings Certificate (NSC’s)	7-8%	8 Years
Senior Citizen Savings Scheme	8-9%	5 Years
Bank Fixed Deposits	6-7.50%	5 Years
Life Insurance	According to Plan	3 Years
Equity Linked Savings Scheme (ELSS)	12-15%	3 Years

Stock-Picking Strategies: Value Investing

Value Investing is one of the best known stock-picking methods. In the 1930's Benjamin Graham & David Dodd, finance professors at Columbia University laid out what many consider to be the framework for value investing. The concept is actually very simple, find companies trading below their inherent worth.

The value investor looks for stocks with strong fundamentals including earnings,  dividends, book value & cash flow - that are selling at a bargain price, given their quality. The value investor seeks companies that seem to be incorrectly valued (undervalued) by the market & therefore have the potential to increase in share price when the market corrects its error in valuation.

Value, Not Junk!
Before we get too far into the discussion of value investing, let's get one thing straight. Value investing doesn't mean just buying any stock that declines & therefore seems "cheap" in price. Value investors have to do their homework & be confident that they are picking a company that is cheap given its high quality.

It's important to distinguish the difference between a value company & a company that simply has a declining price. Say for the past year Company A has been trading at about Rs.25 per share but suddenly drops to Rs.10 per share. This does not automatically mean that the company is selling at a bargain. All we know is that the company is less expensive now than it was last year. The drop in price could be a result of the market responding to a fundamental problem in the company. To be a real bargain, this company must have fundamentals healthy enough to imply it is worth more than Rs.10 - value investing always compares current share price to intrinsic value not to historic share prices.

Value Investing at Work :
One of the greatest investors of all time, Warren Buffett, has proven that value investing can work. His value strategy took the stock of Berkshire Hathaway, his holding company, from $12 a share in 1967 to $70,900 in 2002. The company beat the S&P 500's performance by about 13.02% on average annually! Although Buffett does not strictly categorize himself as a value investor, many of his most successful investments were made on the basis of value investing principles. (See Warren Buffett: How He Does It.)

Buying a Business, not a Stock :
We should emphasize that the value investing mentality sees a stock as the vehicle by which a person becomes an owner of a company. To a value investor profits are made by investing in quality companies, not by trading. Because their method is about determining the worth of the underlying asset, value investors pay no mind to the external factors affecting a company, such as market volatility or day-to-day price fluctuations. These factors are not inherent to the company & therefore are not seen to have any effect on the value of the business in the long run.

Contradictions :
While the efficient market hypothesis (EMH) claims that prices are always reflecting all relevant information & therefore are already showing the intrinsic worth of companies, value investing relies on a premise that opposes that theory. Value investors bank on the EMH being true only in some academic wonderland. They look for times of inefficiency, when the market assigns an incorrect price to a stock.

Value investors also disagree with the principle that high beta (also known as volatility, or standard deviation) necessarily translates into a risky investment. A company with an intrinsic value of Rs.20 per share but is trading at Rs.15 would be, as we know, an attractive investment to value investors. If the share price dropped to Rs.10 per share, the company would experience an increase in beta, which conventionally represents an increase in risk. If, however, the value investor still maintained that the intrinsic value was Rs.20 per share, he would see this declining price as an even better bargain. The better the bargain, the lesser the risk. A high beta does not scare off value investors. As long as they are confident in their intrinsic valuation, an increase in downside volatility may be a good thing.

Screening for Value Stocks :
Now that we have a solid understanding of what value investing is & what it is not, let's get into some of the qualities of value stocks.

Qualitative aspects of value stocks: 

1. Where are value stocks found? - 
• Everywhere. Value stocks can be found trading on the  NYSE, Nasdaq, AMEX,  over the counter, on the FTSE, Nikkei & so on.
2. a) In what industries are value stocks located? - 
• Value stocks can be located in any industry, including energy, finance & even technology (contrary to popular belief).
3. b) In what industries are value stocks most often located? - 
• Although value stocks can be located anywhere, they are often located in industries that have recently fallen on hard times, or are currently facing market overreaction to a piece of news affecting the industry in the short term. For example, the auto industry's cyclical nature allows for periods of undervaluation of companies such as Ford or GM.
4. Can value companies be those that have just reached new lows? - 
• Definitely, although we must re-emphasize that the "cheapness" of a company is relative to intrinsic value. A company that has just hit a new 12-month low or is at half of a 12-month high may warrant further investigation.

Here is a breakdown of some of the numbers value investors use as rough guides for picking stocks. Keep in mind that these are guidelines, not hard & fast rules. 

1. Share price should be no more than two-thirds of intrinsic worth.
2. Look at companies with P/E ratios at the lowest 10% of all equity securities.
3. PEG should be less than one.
4. Stock price should be no more than tangible book value.
5. There should be no more debt than equity (i.e. D/E ratio < 1).
6. Current assets should be two times current liabilities.
7. Dividend yield should be at least two-thirds of the long-term AAA bond yield.
8. Earnings growth should be at least 7% per annum compounded over the last 10 years.

The P/E and PEG Ratios :
Contrary to popular belief, value investing is not simply about investing in low P/E stocks. It's just that stocks which are undervalued will often reflect this undervaluation through a low P/E ratio, which should simply provide a way to compare companies within the same industry. For example, if the average P/E of the technology consulting industry is 20, a company trading in that industry at 15 times earnings should sound some bells in the heads of value investors. 

Another popular metric for valuing a company's intrinsic value is the PEG ratio, calculated as a stock's P/E ratio divided by its projected year-over-year earnings growth rate. In other words, ratio measures how cheap the stock is while taking into account its earnings growth. If the company's PEG ratio is less than one, it is considered to be undervalued. 

Narrowing It Down Even Further :
One well-known & accepted method of picking value stocks is the net-net method. This method states that if a company is trading at two-thirds of its current assets, no other gauge of worth is necessary. The reasoning behind this is simple, if a company is trading at this level, buyer is essentially getting all permanent assets of the company (including property, equipment, etc) & the company's intangible assets (mainly goodwill, in most cases) for free! Unfortunately, companies trading this low are few and far between. 

The Margin of Safety : 
A discussion of value investing would not be complete without mentioning the use of a margin of safety, a technique which is simple yet very effective. Consider a real-life example of a margin of safety. Say you're planning a pyrotechnics show, which will include flames & explosions. You have concluded with a high degree of certainty that it's perfectly safe to stand 100 feet from the center of the explosions. But to be absolutely sure no one gets hurt, you implement a margin of safety by setting up barriers 125 feet from the explosions. 

This use of a margin of safety works similarly in value investing. It's simply the practice of leaving room for error in your calculations of intrinsic value. A value investor may be fairly confident that a company has an intrinsic value of Rs.30 per share. But in case his or her calculations are a little too optimistic, he or she creates a margin of safety/error by using Rs.26 per share in their scenario analysis. The investor may find that at Rs.15 the company is still an attractive investment, or he or she may find that at Rs.24, company is not attractive enough. If the stock's intrinsic value is lower than the investor estimated, the margin of safety would help prevent this investor from paying too much for the stock. 

Conclusion :
Value investing is not as sexy as some other styles of investing; it relies on a strict screening process. But just remember, there's nothing boring about outperforming the S&P by 13% over a 40-year span! 

(Data as taken from multiple sites for presentation here)

Art Of Cutting Your Losses

One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.

No one will deliberately buy a stock they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to the nature of investing. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out from the crowd and show you how to identify when you should make your move.

Reasons Investors Hold Stocks With Large Unrealized Losses
In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it's "dead" money; at worst, it drops further in value and never recovers. Typically, investors believe that the reason they have so many large, unrealized losses is because they bought the stock at the wrong time or it was a matter of bad luck. Rarely do they believe it is because of their own behavioral biases.
Let's look at a few of these biases:

• Stocks Always Bounce Back - Don't They? - A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long time period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners. Those less successful stocks may have been part of an index at one time, but if they've dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some go bankrupt.

• Investors Do Not Like Admitting They've Made a Mistake - By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they've made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even, and "erase" their mistake. Unfortunately, many of these same stocks will continue to slide.

•  Neglect - When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for long time periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.

• Hope Springs Eternal - Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out strategy; and unfortunately, wishing and hoping that a stock will go up does not make it happen.

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. The first thing to understand is that hope is not a strategy. An investor has to have a logical reason to hold a losing position. The second point is, what you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock's underlying fundamentals and its future prospects.
Having a written investment strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be based on fundamental, technical or quantitative factors. 

• Have Reasons to Sell a Stock - An investor generally has quite a few reasons why he or she bought a stock, but typically no set boundaries for when to sell it. Don't let this happen to you. Set reasons to sell stocks, and sell them when these things occur. The reason could be as simple as: "Sell if bad news is released about corporate developments or a price target."

• Set Stop Losses - Having a stop-loss order on shares that you own, particularly the more volatile stocks, has been a mainstay of advice on this subject. The stop-loss order prevents your emotions from taking over and will limit your losses.

• Would You Buy the Stock Now? - On a regular basis, review every stock you hold and ask yourself the simple question: "If I did not own this stock, would I buy it today?" If the answer is a resounding "No", then it should be sold.

A tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive tax credits that can be used to offset taxes on your capital gains.

Conclusion
Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses entirely may not be possible; successful investors accept this and try to minimize their losses rather than avoid them. Selling a stock at a loss and receiving a tax credit is one benefit you will receive. Selling these "dogs" has another advantage too - you will not be reminded of your past mistake every time you look at your investment statement. 

(Good Article to read by Ken Hawkins)