I know that losing money from your investments isn’t fun. I’ve been there – it’s like having the wind got knocked out of you and you can hardly breath. Over the past 5 years of my investment career, I’ve lost (and gained) a ton of money in the stock market, in commodities, and a little in currencies. The reality is, every investor will lose money at some point in his or her life. However, the successful investor makes sure that his or her gains is more than enough to make up for those losses. The important thing is that you know how to overcome the pain of losing money, which throws your psyche off track. That way, you can learn from your losses and become a more successful investor in the future. Here’s what you need to do if you’ve lost money on your investments recently.
Don’t Do Anything Rash
You must realize that losing money is not the end of the world. Everyone, at some point in his or her life, will lose money. That’s a fact. Don’t become obsessed with the fact that you just lost money. Thus, what you must do is to calm down. If you frantically grope around, panicking, the situation will only get worse. When you lose money, your mind is automatically thrown into a “fight or flight” mentality. You need to calm down so that you remain in control of your rational thought. Investing purely on emotions (which are all over the place after you lose money) is the fastest way to make that loss even bigger.
Don’t Do Anything
After losing a lot of money, the first thought that comes to mind for many investors is “I have to make that money back, and I have to do it right now”. Such a thought is dangerous for your portfolio. Do not go out any invest in any random market just because you want to quickly make up for your loss. If you do this, I guarantee that your loss will only grow and grow and grow. Why? Because when you invest in “any old thing” just because you want to make $X, you end up making rash investment decisions. When you make a rash investment decision, you aren’t necessarily thinking it through carefully. Thus, you will most likely lose money.
So after you’ve lost money, don’t do anything. If you jump back in to the market in a heartbeat, you will only lose more money and magnify the pain. Just don’t do anything. Feel free to take a breather.
Take a Break
The worst thing you can possibly do after you’ve lost money is to become obsessed with those losses. You need to take a break and have some fun. Losing money will really hurt your self confidence and pride, so what you need to do is go out and relax. Go on vacation or something. Do anything that can turn your thoughts away from your damaged portfolio.
Personally, whenever I lose money I either:
A) Go hiking for a day. Nature helps humans calm their minds and let’s them appreciate the beauty in the world. When investors lose money, a lot of them will think “why the hell is the world is cruel?” Taking a hike makes one realize that there is beauty and good in the world.
B) If I lost a big chunk of money (e.g. 30%+), I will go on vacation for a week or two. Nothing too expensive (which means no cruises), but I will drive around the country visiting new places and sights.
Take a Good Hard Look at Your Loss
After you’ve taken a break and calmed down your fried nerves, it’s time to sit down and really look into your losses. Let’s assume that you’ve lost money by investing in Wall Street investment banks.
Take a magnifying glass to your portfolio and ask yourself. What exactly did you do that resulted in a loss of money? What wrong investment decisions did I make? Was my forecast regarding the market’s direction (bullish or bearish) wrong? Was my timing incorrect? Did I enter the market too early or too late? Was there something I missed that would have made the crucial difference towards this investment’s success?
The second worst thing you can do after a loss is forget about it and say “better luck next time”. If you do that, you will never learn from your mistakes! And if you don’t learn from your mistakes, you will never, ever improve! You will continue making the same losses over and over again!
Wait for the Best Opportunity
Why is it that investors who lose money just continue to lose money? Because they’re thrown off track! Their mojo is gone!
After you lose money, what’s important isn’t making back that money but to earn back your shattered confidence. That why it is absolutely crucial that the investment you make after losing money is a winner. You must wait for the best investment opportunity, or as the Greeks say, “wait until all the stars align” (whatever the hell that’s supposed to mean).
Hi there! I’m Troy, and I’m an avid investor. Feel free to follow me on Twitter.