When you lose money playing blackjack, you only have to push yourself away from the table and head for the $9.99 all-you-can-eat buffet. But when you lose money in the market, backing away from your losses isn't nearly that easy. You have to make tough decisions about what to sell, when to sell it and where to reinvest that cash. Investors are grappling with how to handle all the losses they've racked up over the past two-and-a-half years. Here are some useful comments from a few readers along with some helpful hints.
A Loss You Can't Use
There's at least one good thing that comes out of losing money in the market: You might be able to pay Uncle Sam less in taxes for years to come. Thankfully, you can get rid of money-losing stocks or funds and take that loss on your taxes, using it offset capital gains that you might have. If you don't have any gains, you use those losses to offset as much as $3,000 in ordinary income in a year. And you carry forward those losses and use them for years to come. But reader Hank Howard wants to know how to deal with losses in a tax-deferred account. Howard writes: "It seems to me that one's choices are to hang on and hope for the best, or make a sideways move to another investment that has been equally beaten up, and that you have determined will bounce back, hopefully, better. Know what I mean?" Many investors know what he means. In a tax-deferred account, you can't use any losses on your annual tax returns. If you've got losing stocks or funds in a retirement account, like an IRA, you're out of luck. That's one reason you'll often hear investment professionals suggest that you buy index funds outside of an IRA or 401(k). Those funds, after all, are already so tax-efficient that sheltering them in a tax-deferred account isn't really necessary. The thinking: Keep aggressive growth funds that might make big distributions every year in your retirement accounts. Unfortunately, it's those aggressive funds that have lost so much money for people over the last few years. And you can't take advantage of any losses you have in those funds -- if you bought them in your IRA or 401(k). But hopefully, you do have some solid funds in your retirement accounts. Remember: A fund that's lost money isn't necessarily a bad fund. "If the fund has done well compared to other funds in its category, there isn't any reason to change," says financial adviser Ron Roge in Bohemia, N.Y. "Just because you have a loss doesn't mean you should sell it." On the other hand, if a fund has performed poorly compared to its peers over the past several years, then you may want to move your money elsewhere -- into a similar fund or perhaps a less-aggressive one.
Dumping a Definite Dud
But there are some beaten-down investments that you shouldn't hang on to. I've said it before and I'll say it again: You probably don't need to hold on to a stock like a Qwest ( Q) that's plagued by accounting problems, regulatory investigations and a bullet-riddled business model. But some people disagree with that attitude. One reader wrote in to say that it's "asinine." The person -- who didn't leave a name -- wanted to know: "Why is the media so into bashing WorldCom -- even when it is on its knees bleeding to death? By the way, how is a company 'plagued' by regulatory investigations? Are they going to cause the stock to drop from $0.11 to $0.105?" The point is that plenty of investors are still sitting on stocks that may never come back, and they might as well just get rid of them -- particularly if they can use those losses on their taxes. If a company files for bankruptcy, the stockholders will wind up with little or nothing left anyway. In a bankruptcy, creditors and bondholders get paid before the stockholders. Assuming a company goes bankrupt and there isn't enough money to go around to pay off all the creditors, the stockholders would get nothing. Of course, there are some instances when it may not make sense to dump a stock that's now trading for pennies a share. Say you own 100 shares of WorldCom. The stock, which was delisted from the Nasdaq and now trades on the Pink Sheets , now sells for about 14 cents a share. For 100 shares, you'd get about 14 bucks. And you'd probably have to pay more in a commission to sell, so that trade may not be worth it. Hey, you could always try to sell your stock certificates on eBay.