It is no secret that losses are always a part of the equation when investing or trading in the stock market. However, sometimes these losses can become overwhelming, especially when they greatly exceed those for which you had planned.
Any seasoned investor or trader will tell you horror stories about their first financial crisis and how they were ready to give up. It is safe to say that most successful investors experienced failure at certain times, even catastrophic losses, however, they were able to deal with them and reclaim their success. Perhaps after reading this article, you will feel equipped to do the same.
Experiencing Financial Loss
Before diving into how to deal with losses, let’s first examine the most common reasons they occur. As mentioned before, we will not be discussing planned losses, such as those that are normally part of a long-term investment strategy, but rather, losses that are unexpected and significant.
Everyone makes mistakes, and when it comes to financial markets, there are many moving parts and a lot of room for error. Here are some common mistakes:
- No trading or investment plan — As basic as it sounds, many traders and investors try to “play it by ear” and don’t have a set financial plan when they start making transactions. This is a common, yet crucial mistake. Before investing a single cent, make sure your strategy is set and your targets are clear.
- Trading with your gut — A trader or investor who relies on gut feelings is neither the former nor the latter. They are, for lack of a better term, gamblers. What you “feel” about a certain transaction is usually irrelevant. Make your calculations, analyse, devise your strategy and stick to it.
- Only looking at performance — Large percentage yields are great, obviously, however, they are not the only thing to look for. Chasing after a certain asset or asset class that recently showed peak performance is not something that should be high on your list of considerations. Past performance is never an indicator of future results, and when you use it for analysis, it is crucial to look at the larger scope, rather than just recent performance.
- Using too much leverage — Traders often use leverage as a means of getting more exposure. While this is a powerful tool, it may also be the harbinger of your downfall, since losses are also leveraged. The golden rule of “only risk capital you are prepared to lose” is multiplied when it comes to using leverage.
The Mental Effects of Financial Loss
It is absolutely normal to feel a sense of grief when suffering from financial loss. Don’t be ashamed and don’t run away from the feeling. Accept it and take responsibility. Even if your loss happened by mistake, something unexpected happened, or you see it as someone else’s fault — it is still your loss. Own it, come to terms with it and look forward. Don’t run away from it, but also, don’t dwell on it.
How to Survive and Mentally Recover from Financial Loss
If you’re reading this, odds are, you or someone you know, has experienced financial loss. There are many ways to pick yourself up and deal with such an event. Here are a few recommended steps:
- Take a break — It is tempting to try and regain all of your losses by finding a new opportunity. However, most experts will tell you that it’s better to take a step back. Regroup, refocus and only return to trading when you feel you’ve moved past your loss emotionally and you have the capital to risk.
- Dust yourself off — As unpleasant as it might be, you will need to get over the emotional cost of your financial loss. Don’t beat yourself up and don’t “sink” into your feelings. Accept your loss and know that blaming yourself (or someone else) won’t change the situation.
- Make a plan — Having a plan when trading or investing is paramount to success. Do your research, find the right strategy, asset allocation and risk management approaches, and most importantly: Learn from your past mistakes and incorporate the lessons learned into your new plan.
- Find inspiration — Read about other people’s failures and successes. Find a story that starts like yours but, with careful personal finance planning and preparation, has a happy ending. Don’t get tempted by fairytale endings — model your success on a story of proper research, caution and calculated action.
- Focus on yourself — It’s not all about finance. If you feel as if you have neglected yourself or given up on your hobbies, make sure to focus on that for a while. To the extent that you can regain control, get your life in order and try to create a pleasant backdrop for your return to the world of finance.
Rebuilding Yourself and your Portfolio
There’s an old saying: “Markets take the escalator up and the elevator down.” In other words, keep in mind that your financial recovery will most likely take longer than it took you to lose your funds. However, this can also be an advantage, as a long-term plan can help you gain perspective and fine-tune your strategy as you go.
- Clear your head: As mentioned above, the first step towards recovery is getting rid of your emotional baggage. Your recovery and future financial success rely on you having a cool and calculated approach. Therefore, if you feel as if you’re still “stuck” due to your emotional response to your loss, focus on regaining your calm and clarity first.
- Pace yourself: Remember that slow and steady wins the race. Don’t try to make up all of your losses at once. It will take time and perhaps a large number of transactions. Try to clean the slate and let go of all the prejudice you may have had for or against a certain asset or asset class. Take a breather and read up on current and future market opportunities. Make sure to do so from credible sources and accomplished financial experts, rather than get-rich-quick “gurus.”
- Stay disciplined: Once you figure out the right strategy for you, one that takes your desired level of involvement into account and employs risk-management practices, stick with it. It’s ok to fine-tune along the way, but remember to keep true to your plan. At the same time, don’t be afraid if you see some red. Your plan should take setbacks and small losses into consideration.
Learn from your mistakes: Remember what led to your loss and try to avoid it and prepare for it. You know yourself better now, and if you treat your first loss as a lesson, you can improve as a trader, investor and financial planner, and work towards your current recovery and future financial success.