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Saying Goodbye To Financials
Separating emotions from investment decisions has been cited by investment hall-of-famers as a determining factor for investment returns. Investors feeling the pain of watching their holdings in financials like Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) fall more than 60% since the beginning of 2008 through the beginning of December may be considering their options at the start of this year. Let's take a look at a couple of factors to consider when making the decision to hold for the future or to sell and take losses. (For more on how to succeed during times of financial crisis, take a look at our Financial Crisis Survival Guide.)
Holding for the Future
For investors with at least a three- to five-year time horizon for their financial investments, holding on for a turnaround is not the worst possible decision. Holders of Goldman stock may be in the best position to recover. Goldman has been able to avoid the major write-downs associated with subprime mortgages that have been taken by Citigroup and Bank of America until recently. Wall Street analysts expected the former investment bank to post a fourth-quarter loss on December 16th, and were proved right when the loss was even bigger than estimated. Despite its loss for the fourth quarter, Goldman's position as the bank that other banks, including Wachovia, Bank of America and UBS (NYSE:UBS), turn to for advice is one of many factors likely to help the stock rebound in the future. (Find out which catalysts can turn struggling stocks around to create a tidy profit in Turnaround Stocks: U-Turn To High Returns.)
Sell and Cut Losses
For investors with less than three years to wait, the decision comes down to when the money tied to the investments will be needed because recovery for many firms is years away. Citigroup, for one, announced its intention to lay off 50,000 workers back in November 2008. In addition, the $25 billion slice of the Troubled Asset Relief Program (TARP) invested into the company in return for preferred stocks and warrants could further dilute the value of stock held by existing shareholders. Even with the U.S. government stepping in with another $20 billion injection of capital and promises to guarantee $306 billion of Citigroup's troubled assets, investors who are unwilling to sell their holdings are guaranteed a long and bumpy road to recovery.
Final Thoughts
Even deciding to do nothing is making a decision, because many individual and institutional investors will use the New Year to clear their accounts of losers. The hardest part about making a decision is not knowing if you made the right call. Holding on to troubled financials will take a strong stomach and although selling into a decline may be painful for some, it may be their best short-term option if time is not on their side.
Holding for the Future
For investors with at least a three- to five-year time horizon for their financial investments, holding on for a turnaround is not the worst possible decision. Holders of Goldman stock may be in the best position to recover. Goldman has been able to avoid the major write-downs associated with subprime mortgages that have been taken by Citigroup and Bank of America until recently. Wall Street analysts expected the former investment bank to post a fourth-quarter loss on December 16th, and were proved right when the loss was even bigger than estimated. Despite its loss for the fourth quarter, Goldman's position as the bank that other banks, including Wachovia, Bank of America and UBS (NYSE:UBS), turn to for advice is one of many factors likely to help the stock rebound in the future. (Find out which catalysts can turn struggling stocks around to create a tidy profit in Turnaround Stocks: U-Turn To High Returns.)
For investors with less than three years to wait, the decision comes down to when the money tied to the investments will be needed because recovery for many firms is years away. Citigroup, for one, announced its intention to lay off 50,000 workers back in November 2008. In addition, the $25 billion slice of the Troubled Asset Relief Program (TARP) invested into the company in return for preferred stocks and warrants could further dilute the value of stock held by existing shareholders. Even with the U.S. government stepping in with another $20 billion injection of capital and promises to guarantee $306 billion of Citigroup's troubled assets, investors who are unwilling to sell their holdings are guaranteed a long and bumpy road to recovery.
Final Thoughts
Even deciding to do nothing is making a decision, because many individual and institutional investors will use the New Year to clear their accounts of losers. The hardest part about making a decision is not knowing if you made the right call. Holding on to troubled financials will take a strong stomach and although selling into a decline may be painful for some, it may be their best short-term option if time is not on their side.
by
Gregory S. Davis
Gregory is a freelance writer for Investopedia.com. He has a consulting background in the banking, telecommunications and healthcare fields. Gregory is a graduate of the Wharton School of Business. Click here to visit his website.
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