2022-03-31

Unrealized Losses

My investment advisor gave me some very useful advice a few years ago, in a phrasing that I took a liking to: 

Too many people get too excited about unrealized gains, 

And too upset about unrealized losses.

In context, he was trying to persuade me to be content in my simple stock market strategy of making incremental investments I could survive to lose in robust stocks and funds suitable to my personal risk tolerance, and then ignoring the day-to-day market fluctuations until the day I needed to extract the returns on my investments. And, given that my stock investments are merely one aspect of my long term income strategy, I had already planned to trust my investment company and the long-term process. 

I always found it mildly annoying to hear people complain about "how much money they lost 'overnight' when the price of such-and-such stock they owned dropped yesterday," knowing that those same people had not-- unwisely-- subsequently sold those stocks at the reduced price, and therefore had not realized a loss. These people were spending precious stress over unrealized losses. Yes, the instantaneous value of their stocks had decreased; but by still owning the stock they also retained the capacity to realize a gain in the next fluctuation upward. 

Similarly, I remind myself not to get excited when-- on average-- my investments show an increased value: until and unless I liquify some of my financial assets and get a check in the mail, any "gains" I see in my online account are merely nominal. Such unrealized gains are subject to the same risk of market fluctuation as the unrealized losses the day before. 

As best I can, I also try to remember this principle in a more abstract, life-applicable context. I find many instances in which something seems good or bad; but excitement should be tempered until the thing actually comes to pass. I do not take this to be pessimism; it is simply a choice to keep expectations realistic, "not sweat the small stuff," "choose my battles," and "not count my chickens before they hatch."