Turning Short-Term Losses Into Possible Gains

 

While losses should always be avoided, there may be a way to recover — and even profit from— losses under certain circumstances.

Staying Invested

Graham recommends staying invested at all times, since one never knows which way the market may go.

The general rule of thumb is to invest everything except one year of expenses, and any emergency cash.

Loss Recovery

While it makes no sense to actually lose money under any circumstances, once the loss happens, some of it could be recovered as follows.

As mentioned above, one would have to keep a certain amount of cash uninvested because short-term profits cannot be withdrawn without tax obligations.

But short-term losses can be offset against future short-term gains.

This allows one to invest more money than one would normally — after taking a loss — knowing that some of the profits can be withdrawn without tax obligations.

Possible Outcomes

If the market goes up significantly in the following months, one may even recover more than one lost.

But if the market drops and cash is desperately needed for some reason at such lower levels, one may end up losing even more.

Conclusion

On the whole, this is a calculated risk. The strategy is complicated and dangerous.

So it still makes no sense to deliberately take a loss. It's simply much easier and more profitable to just invest for the long-term.

But if one just lost some money — and market seems to be on the verge of a big recovery — this may be one possible strategy for loss recovery, and to maybe even make a small profit.