It can be alarming to invest money hoping to see it increase only to see it disappear. That happens to most investors at some point, as markets go down as well as up. Sometimes, looking at my Stocks and Shares ISA, I see its value is in the red. That could be alarming – so here is what I do.
Understand paper losses
Stock markets move up and down, as do individual shares. The valuation of a portfolio, such as that held in a Stocks and Shares ISA, is usually a snapshot of the money I would expect to get if I sold the shares today. But if I do not sell, a negative valuation is only what is known as a paper loss.
As the name suggests, it exists on paper (or a screen). If I sold at the current price, I would make a loss. But I can keep owning the shares and doing nothing. If they move up in price, my ISA may move into the black again. Then again, they might not recover. Shares that fall can keep falling.
A valuation is a summary of what the whole universe of investors thinks my portfolio is worth right now. I actually think that is valuable information for me to have even if it makes for difficult reading. Indeed, it might lead me to re-evaluate some of my investment decisions. Crucially though, the paper loss does not mean I have actually lost money — unless I sell the shares at such a price.
Revisiting investment cases
But imagine that a share in my ISA is showing a huge loss – maybe it is 50%, 70% or even 90% lower in price than when I bought it.
Although that does not mean I have actually lost money if I have not sold any shares, it certainly would grab my attention. Imagine a share fell 90%? Sadly I do not need to imagine this, as the past year has seen the share price of my holding Renalytix tumble 89%. So basically, if the market reckons a share is worth just one tenth of what I paid for it, what does that tell me about its valuation?
Reshaping my Stocks and Shares ISA
Either I have overvalued it, or the market overall is undervaluing it. We cannot both be right.
Therefore, a large fall could be a trigger for me to revisit the investment case for a particular stock. If things have changed that affect how I value a share, such as a worse profit outlook, maybe I will think the price drop is justified. In that case I may decide whether I want to keep holding the shares, or act on the changed investment case and sell at a loss. Doing the latter can be painful, but less costly than selling at an even bigger loss further down the line.
What if I think nothing fundamental has changed in the investment case but the shares are now much cheaper than they were? In that case, I may decide to use the price drop as a buying opportunity to add to my position, while never letting any one single share become too dominant in my ISA.
