I invested a considerable amount of money in investment funds. It was almost 5 years ago. I'm about -20%. (Yes, I feel like an idiot so let's please not discuss the exact reasons - enough to say the main industry I invested in has been experiencing a horrible time).
When should I cut my losses?
I don't need the money right now, but I would like to use it in about 6-8 months if possible, otherwise I will need to change my plans.
It depends on how that -20% came to be. Is it just a short-term correction (in the last few months) or is this a long-term trend (more than a year) in your portfolio?
If it's short term, stay invested. But if it is a long term downward trend and you think that the industry you invested in has no/bleak future, then sell it now. The sooner you get your money out of loss making assets, the sooner you can put them in more profit generating assets.
Even if you end up using the money 6 months down the line, you will still be able to recover some of the loss.
If you need the money in 6-8 months, then get out of equity investments now. the probability of significant gains over that period is relatively small, but the probability of losses is very significant.
Don't let the losses you've already incurred affect your decision (other than potential tax benefits). Those are sunk costs. The only thing you should consider is what you think the investment will do going forward and whether you are willing to risk more losses.
This question brings up an important issue, namely: it's critical to set a trigger price that would create a sale BEFORE investing. There are no simple answers here, since every investors risk tolerance, time horizon, investment goals, etc. vary.
That said, a simple example illustrates the point. A short term trader is using a 50-day/200-day moving average signal for determining buy/sell decisions. When the 50-day average rises above the 200-day average, buy. When 50-day average < 200-day average, sell.
The strategy details will differ, depending on your situation, but having the buy/sell parameters in place before the trade is essential.
As to the specific point about when to cut losses, there's not enough information to offer an informed response. Much depends on the stock. For instance, a blue chip company that's down 20% is a different scenario vs. a penny stock.
When considering taking a loss, common advice out there suggests asking yourself these questions:
1) Why did buy the security? 2) Has anything changed? 3) If you had no position today, would you buy the security now at the current price?
... if after your research you come to the same conclusion as when you initially purchased the stock, keep it.
I'd counter that with: If your ability to research was that good in evaluating future prospects then you wouldn't be in this position in the first place. Therefore, my simple short answer would be that you cut your losses when you can no longer tolerate further loss. If you are willing to risk further loss in the hope that you will recover from the condition of Breakevenitis then hang in there.
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Q: "When is the correct moment to cut one's losses?"
A: Before the loss gets larger.
The concept of "cutting your losses" with respect to stocks is a poor one. That falls into the category of "trying to beat the market". If the reason you suffered such large losses is because you weren't diversified, then you should move some money out of your current positions to diversify, but you shouldn't let the sunk costs cause you to allocate your assets differently than if you hadn't had the loss.
If it's an actively managed fund that is losing money, that's a different matter. Then you have to figure out whether it was just luck, or poor management (although the very fact that losses were so large again points to lack of diversification).
Forget the 20% you have already lost. Nothing you do now will get it back again. It makes no difference to what you should do next.
Get your crystal ball out, and try to guess what is going to happen next:-
If it's 1, sell now and invest in something better. If it's 2, consider selling and buying something that is going to go up. If it's 3, stick with it.
