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Let's say hypothetically you buy 100 shares of company XYZ today @ $150 per share.
You believe in this company and intend to hold the 100 shares indefinitely.
After a short time, the share price drastically drops to $100 per share.
Is it better to realize the loss and buy back in at the lower price or just hold it?
Is it better to realize the loss and buy back in at the lower price or just hold it?
I'm not a big fan of hypothetical questions. It depends on what you're trying to optimize for, i.e. taxes or total return. Most investment advisors would tell you "don't let the tax tail wag the investment dog."
There's an opportunity cost to selling with the intent to buy back in at a lower price. What if it recovers as quickly as it dropped? What if it drops further?
Time in the market generally beats timing the market. If you liked the stock at $150 and intend to hold it indefinitely, you should love it at $100 and consider buying more instead of selling.
Adding my comment to the answer:
You can't realistically assume that you're selling and buying at the same price.
Even if you did, what's the point? If you're selling/buying near instantaneously the loss will be disallowed due to the wash sale rule, which prohibits selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale.
If you wait long enough, it's virtually impossible to buy back in at the same price. At a minimum, you're crossing the bid-ask spread.
If you're asking about taxes, you'd need to specify a country. If you're in the US (based on your profile), you'd have a wash sale unless you bought the shares back more than 30 days later in which case you wouldn't be allowed to deduct the capital loss. So in the US, unless you want to exit the position and stay out for more than 30 days before buying the shares back, you're better off holding the shares.
If you are willing to stay out of the position for more than 30 days, then it can be reduced to a math problem. But you'd need to make guesses about things like what the capital gains tax rate will be when you sell, what discount rate to apply to get the present value of future cash flows, etc. And if you're thinking of holding the shares until you die, potentially you'd never owe capital gains tax...
Rule of thumb: If you would buy the stock if it was offered to you at this new price, you shouldn't be selling it at this price.
Another rule of thumb: Buy low, sell high. If the cost of the stock has dropped, and you believe it will recover, then if anything you should be buying more to take advantage of that recovery.
If you buy the shares because you believe in the company, then you should actually buy more shares, since the price is now lower, assuming that the company’s fundamentals didn’t change. Share prices fluctuate a lot, so I don’t see any reason to sell it if you are a long-term investor.
That said, there are some other considerations:
Do options help you? For example, you can use the repair strategy, which involves selling two OTM options and buy an ATM option (or an OTM option with lower strike price). It works for US stocks since you have 100 shares, which is the number of shares per option contract.
Does the company pay dividend? If yes, and if the rate meets your expectation, and if you expect the company pays reasonable amount of dividend in future, your investment is still successful.
If you are trading with cash then, aside from the additional commissions/spread and tax benefits of accruing a tax loss, there is no difference
However if you are using derivatives or margin then when you convert a paper loss to a permanent capital loss you will suffer a reduction in your available margin. That means you may not be able to re-open the original position after a loss - some brokers may also have a higher margin requirement for position opening (initial margin) compared to maintenance margin which may also complicate this. In this case holding is better
There is also a psychological barrier which may prevent you from re-buying after you have taken a loss. Will you still believe in a company after it has caused you a large loss on your capital? I believe a paper loss would be easier to deal with mentally than a loss that had been crystalized
Investment losses can usually be avoided by spreading your money between investments that are not correlated - don't put all your money in a single correlated asset class. A diversified portfolio will prevent you losing money overall and prevent a situation where you are forced to sell because of margin calls, and will give you the ability to hold during a downturn and avoid taking unnecessary capital losses.
Markets are good at testing investor's risk allocation by going in the direction that causes the most pain. It is only those who have a strong diversified portfolio that are able to withstand these painful events that happen very often. The strong survive and the greedy will get flushed out
Leaving taxes out of the equation, from a controlling standpoint, it would depend on whether your expected share of additional transaction cost for 1 sell plus 1 buy operation which you expect is higher than your expected internal calculation interest rate times applied to the volume of the deal for the timeframe you expect to stay out of that asset and can thus invest money at your internal calculation interest rate (in theory infinitely, in practice this doesn't always hold).
The sell and buy-in again investment alternative becomes more favorable in situations where in this formula:
