No one enjoys losing money, but bad years in the stock market are unavoidable. Although you won't be able to fully stop bear markets, you will minimise your losses by following these five steps.
We make investments in the hopes of accumulating long-term capital. It can feel fantastic to see your accounts increase in value while the stock market is doing well. However, when you're in the midst of a losing streak, it can be terrifying.
1. Set realistic expectations
When it comes to saving, you should set achievable goals for yourself. Average rates of return, for example, can be deceiving at times.
For example, if you had invested in large-cap stocks between 1926 and 2020, you would have received a 10.2 percent average return. And if you spent $100,000 and earned this rate of return for 30 years, your money would have risen to $1.84 million.
However, you would have won a high of 54 percent in 1933 and a low of -43 percent in 1931 during the same time span. If you made your first investment during a year of losses, you may be hesitant to do so again.
It's important to realise that your returns will not be linear, but rather an average of positive, negative, and flat returns. And realising this will help you get through the difficult years.
2. Recognize the difference between a realised and unrealized loss.
It may seem that you've lost money when you look at your account balance and see that it's lower than it was the previous month. Unrealized losses or profits, on the other hand, are the figures you see on your statement or when you log into your account. These figures fluctuate during a day of stock market operation for better or worse, and they are only considered direct losses or profits when you sell your holdings.
For instance, if your account balance was $10,000 last month and you lost money this month, it would now be worth $9,000. However, if you sell this investment before it reaches its original value, you can just lose money. The stock market has always risen in value over time, and your investments can do the same if you remain invested.
3. Have an appropriate time horizon
The urgency with which you need funds should have an effect on how well you invest during stock market downturns. If you won't need your money for another 25 years and lose 30%, you can brush it off knowing that your account value will likely recover in a few years. However, if you want to use the money next year, you might be concerned about losing all of it.
Consider the time frame before investing a cent. And the closer it gets, the more cautious you should be with your investments. Losses might not seem as crippling without the possibility of missing your target hovering over your head, and you'll be less likely to give up on investing due to a short-term decline.
4. Control emotions
It's not easy to keep your emotions in check, and when you're losing money, it can feel like it'll never end. However, declines do not continue indefinitely. Learning how to manage your feelings when you're feeling this way can mean the difference between mediocre returns and keeping up with the competition.
When you feel like the sky is dropping and there's no end in sight, looking back at previous stock market declines can be beneficial. Except during the worst times of declines, investors who stuck it out typically recovered their losses within a few years. If you only invested in large-cap stocks from 2000 to 2002, you would have lost about 38% of your money. That would have been about $62,000 if you had $100,000. However, by 2006, you will have recouped all of your losses and be marginally ahead.
5. Invest in line with your risk tolerance.
What are your thoughts on volatility? Do you take it for granted and accept it as a normal part of the business cycle? Or does it make you feel sick every time it occurs?
More aggressive investments can make you more money over time, but they can also cost you money if you have a bad year. If the losses seem to be excessive, these investments may be too dangerous for you.
Staying invested can become more difficult if this occurs. You can avoid this by making sure your investments are in line with your risk tolerance. Even if it yields a lower average rate of return, you can find an asset allocation model that fits your risk appetite.
Investing should assist you in achieving your objectives rather than detract from them. Although it is common for the value of your account to rise and fall on a regular basis, you do not have to lose money. Controlling your fears, ensuring you have enough savings, and setting reasonable goals on how your accounts can increase and the time period in which those gains will occur will all help you prevent it.
Never put money into an investment that you can't afford to lose. Investments are made to make more money, but don't put all of your emergency funds into the stock market. Since you can't survive without the fund you're trading with, investing emergency capital increases the probability that you'll be emotionally attached while making decisions. This could place you in a dangerous situation and lead to unreasonable decisions.