If you plan on investing in the stock market, you know full well you’ll need to endure the risks involved. That means dealing with the inevitable ups and downs when the market bubbles and takes a tumble. While the thought of losing your hard-earned money is scary, with the right attitude and approach, investing is a crucial way to build your wealth.
Here are some tips on how to best deal with and recover from your first stock loss.
Think Long Term
Remember: Recovering from your first stock loss simply takes time. If you stick with it for the long haul, the stock market always goes up, points out Jim Wang, founder of Wallet Hacks. Wang experienced his first stock loss during the dot-com boom. At the time, Wang had a Roth IRA with a balance of $4,000. He opted in to buying shares of a fiber optic company that was rumored to change the world and ended up losing about a thousand dollars.
“I learned that investing was more than just picking a stock that everyone in my small echo chamber was talking about,” says Wang. He continued to diligently invest in his Roth IRA. Eventually, that thousand dollar loss was recovered. “It helped that I got busy with real life and stopped checking stock tickers every day!” laughs Wang.
Investing is all about having a long-term plan, adjusting when necessary and just waiting, explains Wang. “Trying to time the market or gamble may work in the short term, but it’s not repeatable and, thus, not very useful,” he says. “Leave the gambling for the casino, where at least you get free drinks!”
Know Your Limits
When you invest, you’ll need to be comfortable with a certain degree of risk and uncertainty. Figure how much of a loss you’re willing to take, and put in a stop-loss order, recommends Krista Cavalieri, CFP and owner of Evolve Capital. A stop-loss order is placing an order with a broker to buy or sell once the stock hits a certain price. So let’s say you put in a stop-loss order for 25% below the price you bought a stock. That means when the stock hits 25% below the price, it’ll be sold. In turn, you’ll minimize your losses.
Conversely, you can also put in a take-profit order. So if the stock you bought hits 25% above the price you bought it for, it’ll automatically be sold at that price. “This way, you’re making decisions in a calm and rational state of mind, rather than when the stock is tanking or skyrocketing,” explains Cavalieri. “Plus, if you aren’t watching it, your loss is limited to something you can stomach.”
Choose Investments That Line Up with Your Risk Profile
Besides knowing your comfort level with risks, you’ll also want to gauge the risks you’re able to take given your financial needs, explains Tricia Rosen, principal of Access Financial Planning.
Next, choose investments that align with your unique risk profile. “Because appropriate investments would be chosen with the investor’s unique needs in mind, this would enable the investor to ignore the various twists and turns of the market,” says Rosen.
So if you’re investing in your 20s or 30s and are comfortable with more risk, an aggressive portfolio that includes mainly stocks would be a solid approach. But if you’re investing in your 40s or 50s, and are nearing retirement age, a more conservative portfolio with more bonds would be a better fit for your time frame and risk tolerance.
Don’t Try to Predict the Market
Neal Frankle realized he needed to change his approach to investing after he suffered his first loss, which was over $1,000. When he first started investing, he had very little money. In turn, he wanted it to grow it as quickly as possible. That ended up being a costly mistake. Because he was looking for short-term gains, he ended up investing far too aggressively – and ended up with a huge loss.
“If you invest for the long run, don’t react to short-term volatility,” say Frankle, a certified financial planner and chief editor at Wealth Pilgrim. “And keep in mind that if you’re looking for quick gains, your risks go up exponentially. That’s a shame because what really matters are long-term results.”
Frankle soon realized he wasn’t smarter than the market. Nor could he predict it, either. Rather than seeking quick, speculative gains, Frankle now plays the long game and urges others to do the same.
Put Your Loss in Perspective
We know, we know. It’s tough not to react emotionally when you suffer your first loss in the stock market. But keep your chin up. By sticking to the plan you’ve created, you’ll be able to to ride out any lows so you can stay on track.
It’s important to put your loss into perspective, points out Kayse Kress of More With Less Financial Planning. “Did you really lose money that you planned on using, or have you only lost value on paper and will have recovered that value by the time you’ll need that money?” asks Kress.
If your plan is in step with your goals, remember that your loss is only temporary. I remember during the Great Recession when my 401(k) account lost a third of its value. It was a scary moment, and I was certainly tempted to pull my money out. I had to remind myself that it was merely a short-term loss. And guess what: Over time, my money recouped its value and then some.
While dealing with your first loss in the stock market is tough, it’s essential. By learning this hard lesson, you’ll be able to stick it through. In time, you’ll be able to sync up your financial game plan to net gains and, ultimately, grow your money.
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