I have a brokerage account with ~$350,000 and everything is invested in individual stocks. The majority of these stock picks came from my dad who has a very aggressive investment philosophy and warned me that some of these picks were a gamble. Long story short, I have lost about $85,000 in the last 6 months.
I have begun to educate myself more recently and have realized I should have been in index funds all along. My question is what do I do NOW? Should I sell everything and start over with index funds? My entire account is currently up only $15,000 and most of my stocks would fall under long-term capital gains. My 3 gamble stocks have a combined loss of $73,000 (one is now worth $4,000 after I paid $31,000 for it!). Is this stock worth holding onto since it’s basically “worthless” anyways (and maybe I hit the “jackpot” after all)? Or is its value now in that I can use the loss to offset the large capital gains I will have from my other stocks like Microsoft and Apple?
Hey @aaeess11!
So, any question like “is it worth holding this stock” is going to be impossible to answer without pure speculation. But I’ll give you some thoughts:
- If the decision was made for you and that $4K stock was converted to cash, would you BUY that stock back? (If not, then why not sell it?) You might want to read this post on the “Endowment Effect”: Login • Instagram
- Warren Buffett often points out how investors have the exact wrong instinct when it comes to winners and losers. He recommends selling your losers and holding your winners. He makes an analogy about the 90s bulls trading away Jordan because their team has become too reliant on him and instead waiting for the burnout draft picks to improve their game.
That said, I don’t know how to get your portfolio back up more quickly to where it was than just following the market. If I did know that, I’d be a very rich man and I’d be doing that instead of buying index funds. So what’s past is past and we’re dealing with a sunk cost situation. What to do now? Well, it sounds like you’re actually in a pretty good tax situation to make the switch. Only $15K of unrealized capital gains after accounting for the losses. I’d personally pull off the bandaid and switch everything over. Or maybe sell 90% of it to buy index funds and hold 10% that you like to scratch that stock picking / lotto itch if you have one. It’s a lot of money, so you might want to run this by a tax professional too in case there are any other tax implications.
Bummer to be down (we all are btw), but as we know the market always goes up if you zoom out enough 
I also say when we know better, we do better - so while you don’t want to change strategies often, if you’re sure this strategy fits your long term plan I wouldn’t hesitate to rip the bandaid and create a plan to convert over to a (target date) index fund or basket of index funds.
Avoid sunk cost fallacy - if you were starting again today, what would you do?
Here’s what I would consider:
- Write your new strategy/approach down. What would you do if you had $350k in cash today? If you follow the PFC strategy it may be something like 90% in target date index funds and 10% in stocks, crypto, startups, whatever. (Have you gone through the PFC course yet?)
- Figure out a plan to transition. Doing it all lump sum at once is probably the probabilistically correct answer, though planning a smoother transition is sometimes more emotionally appealing to some
- Def double check your tax situation before starting your plan and make sure you have what you need to cover the tax bill, if there is one!
Good luck!