Suffering an investment loss happens to most investors at least once, and a major loss can result in trauma that can be hard to overcome if not managed properly.
The key, experts say, is turning from the loss toward a plan of action and recovery rather than fear and inaction.
It's common for investors who have suffered a catastrophic financial loss to go through the five stages of grief: denial, anger, bargaining, depression and acceptance, says Kevin Heaton, founder of i3 Family Office and Private Asset Management in Lexington, South Carolina.
With clients who are dealing with a major investing loss, Heaton starts them thinking about how they got to the place of despair and then examining the "complex behavioral dynamics related to wealth while creating strategies for future resiliency."
Of course, this is easier said than done. To keep your spirits up after a loss and keep you invested for the long term, take the following steps:
- Move on.
Pause when you take a loss
The worst thing an investor can do after taking an investment loss is to act rashly. "The first step is to not make any major decisions in the immediate aftermath of a major loss," says Forrest Talley, a psychologist with Invictus Psychological Services in Folsom, California. "During this period of time, your thinking is clouded by the emotional gut punch you just received."
Emotions can drive a person to overcompensate to make up for a loss, which can compound a "challenging situation and stimulate a sense of desperation and recklessness leading to even greater losses," Heaton says.
Consulting with competent and trusted legal and financial advisors about how to get back on track can help an investor avoid an over-correction.
"In times of crisis, surrounding oneself with people that are both knowledgeable and experienced in the same type of loss is not only helpful, it fosters one to engage in logical, critical problem solving, a challenging prospect for anyone experiencing extreme stress," Heaton says.
Give your mind a break from the investment situation, such as spending time with friends and family, so you can gain perspective, he adds.
When calm, reflect on your mistakes: is it deja vu? Once you've had some time away from the situation, look back to see if the loss occurred as a result of repeating the same mistake, says Matthew Murawski, a financial planner at Goodstein Wealth Management in Encino, California.
If it is, it's time to engage a professional with no emotion or attachment to your situation help you make future investing decisions. If you have taken heavy losses in individual stocks, Murawski says it may be time for you to "hang that hat up" and move forward using diversified funds instead.
Adjust your expectations
When you invest money in anything, you have an expectation for how things will go. You should also have an idea of what circumstances would cause you to exit that investment and move on," Matthew S. Miller, principal and wealth advisor at Upleft in Port Angeles, Washington, says.
"When you need to let an investment go, there is one simple question to ask yourself," he says. "Forgive yourself for any prior decisions, forget about the past and ask yourself this one question: 'If I woke up today with no investments, would I invest my money the same way it is today?' If the answer is 'no,' then you owe it to yourself to make a change."
Investors also should look at an Ibbotson SBBI chart showing market fluctuation over the past century to help develop a broader view, Murawski says.
You should also think about how you will respond in the event of another loss so you are emotionally prepared. Write down how to contact the people you will consult with and criteria for moving investments into safe havens, Talley says.
"You do not want to be 'winging it' when you just suffered a financial defeat and feel that the foot of death is on your neck," Talley says. "Figure it out when the sun is shining, the skies are bright, and you can think clearly."
You can also begin to journal every investment decision you make as well as the reason for buying it, target holding period and your general feelings about it, to refer back to if it's not performing or you're deciding whether to sell or hold it, says Jake Sensiba, a financial advisor at CRG Financial Services Inc. in Brookfield, Wisconsin.
"If you perform the same analysis every time and you have one loss for every few wins, that lets you know your system works and losses were the result of other factors," he says."Your psychology is your edge. If you're able to weather the storm or can buy when others are selling, you're in good shape."
Now you can move on
Once you've paused, reflected and created a plan of action, there's no need to dwell on it. You're in the market for the long term.
"You once believed that your investment was a good fit for you. This is why it can be so difficult to move on in a more positive direction," Miller says. "Acknowledging that you should make a change, means acknowledging that you could have made a better choice in the past. Rest assured that you are not alone in this. Everyone has made at least one bad investment, and many have paid a very steep price. Eventually, they move on and almost all wish they had done so sooner."
Understanding any misstep sets the stage for a "better path forward," Miller adds.
"With this in mind, you should take the critical step of forgiving yourself," he says.
Clear self-awareness is essential if an investor wants to avoid mistakes, says Lowell Miller, founder and chief investment officer of Miller/Howard Investments in Woodstock, New York.
"Strategy and discipline can neutralize the behavioral minefields raised in investment," he says.
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