Well, I suppose many people are sitting there worried about the status of their investment portfolios in light of our current markets and the headaches happening around the world. Shall I say, we’ve been here before? Well, that doesn’t hold a lot of water for those who weathered investment losses before. Just remember, that they are only paper loses unless they are realized through redemptions or deferred plans. This time that is coupled with the emergence from the pandemic and its implication to those plans.
Coulda, woulda, shoulda, or some variation of those words, is something my father liked to say to me when I recount a loss or missed opportunity. The semi-sarcastic reply with a kind sincerity always results in a wry smile. That’s because there’s something healing about the saying.
We’ve all felt that sting of a financial loss. But when it turns into a persistent pain, you’ve got to do something about it because then, you’ll both feel much better. You and your bank account.
My father’s subtle wisdom around retrospection applies to investors as well. It implies moving on with the right perspective. Remember that the value of your portfolio is always hypothetical until you actually sell. You own securities that could fetch a certain amount if sold. But were you planning to sell them all today? And why didn’t you sell them earlier?
Mistakes we make
What led you to sell, not sell, buy, or not buy is often frustrating, stressful, and even fear-inducing to try to figure out. These emotions can be an issue.
The problem is that if we go seeking more information when we feel afraid, we might easily get more worked up because our perceptions of risk can be affected by aspects of risk information itself, and by contextual clues such as colour, graphics, and sound effects. Multiple studies have shown that fear itself can make negative outcomes seem more likely, so doing an information search when you are already afraid can magnify rather than reduce fear and anxiety.
- Influence of Fear – Losses weigh heavily on our minds, even more so than gains. Experiencing a loss generally feels twice as bad as gaining the same amount. Combine that with the internet, and it’s easy to fall into a vicious cycle of fear, fear-of-missing-out and bad trades, especially in the online age. Sentiment from the wrong source at the wrong time can easily lead to repeat appearances on the wrong side of the trade. Information is valuable, and we must do our due diligence as investors and research the products and services we buy before we buy them. However, we also need to be wary of how the presentation of investment information makes us feel and avoid doom scrolling and sensationalism when we are emotionally vulnerable.
- Doubting the original plan – Feelings of loss can have you doubting a well-vetted strategy and can lead to the rushed offloading of risky assets. This is known as loss aversion. This powerful bias can lead to a string of financial mistakes, such as overreacting when experiencing a loss, prompting you to be overly cautious the next time around or try to take on added risk to make up for bad performance. Moving money out of risky investments to cut our losses might make us feel safer and calmer in the short run. But it may very well be long-term financial self-sabotage. Repeated studies show that people who move their money more frequently consistently underperform both the market and their more composed peers.
Move on from financial loss
If looking at a balance in the red has you feeling stressed or scared, silence the pundits and doomsayers. They most certainly will not help put you in the right frame of mind to do your best reasoning.
One way to get in the right frame of mind is by changing the narrative. When there’s market volatility and my portfolio takes a hit, I try to reframe the situation. Market volatility can be treacherous, but it can also be an opportunity to buy some quality investments for low prices.
Reframe the situation – While taking a new perspective on your loss, you’re still allowed to look back. But be fair to yourself. Try not to anchor on the highest-ever estimated value. To mentally attach yourself to the highest hypothetical value those collective assets might ever have produced for you if you sold them all at one go is basically setting yourself up for pain. That highest-ever value is an estimate, not a reality, she adds, and I think we give it too much power over our well-being.
If you find your financial troubles are weighing on you, getting out can make a world of difference. Another thing I try to do is get out of my own head. For example, by taking a walk, volunteering within my community, or just helping out a friend. Helping others can help put things in perspective. With a refreshed and balanced state of mind, even a financial loss can seem less daunting.
- Go ahead and grieve -Part of taking back control of our emotional health also involves letting go. Go ahead and grieve. If you can’t reframe it, you might have to let yourself feel it. If you must sell or forfeit assets for less than you paid for them, there will be pain. In that case, feeling and processing the loss is actually important so that unresolved fear or resentment doesn’t negatively affect future investment decisions. Losses are really just part of the playing the game and finance may be no different. Even a well-constructed portfolio that has substantial equity exposure will lose value about one-third of the months in its lifetime.
- Reframe the situation – While taking a new perspective on your loss, you’re still allowed to look back. But be fair to yourself. Try not to anchor on the highest-ever estimated value. To mentally attach yourself to the highest hypothetical value those collective assets might ever have produced for you if you sold them all at one go is basically setting yourself up for pain. That highest-ever value is an estimate, not a reality, she adds, and I think we give it too much power over our well-being. If you find your financial troubles are weighing on you, getting out can make a world of difference. Another thing I try to do is get out of my own head. For example, by taking a walk, volunteering within my community, or just helping out a friend. Helping others can help put things in perspective. With a refreshed and balanced state of mind, even a financial loss can seem less daunting.
- Set boundaries -We should also set up boundaries between the investment world and ours for our sanity’s sake. Use a check-in schedule after a loss. If I lost some amount in my portfolio, instead of constantly checking it, I restrict myself to only checking it once a day or less. Constantly checking in on your portfolio after you experienced a loss will only lead to further stress and, maybe down the line, behavioural mistakes.
- Don’t mistake bad outcomes -Mental boundaries are also important to establish in investing, so try not to take outcomes too personally especially when you’re up against the laws of probability. Any decision we make as investors has a probability of good outcomes and a probability of bad outcomes. That’s risk. If you make an excellent decision, there is still some probability that it will turn out badly. Just as bad decisions can sometimes turn out well. A bad outcome doesn’t mean you made the wrong choice.
That’s all fine and good, but how do I sum up what I am trying to say.
Take an example. If I bet you that aliens will land on earth tomorrow, taking that bet would probably be a good decision. If by some fluke of cosmic history, we are visited by aliens tomorrow, it doesn’t make your decision to take the bet a bad one. It simply means that the outcome fell into the absolute minimum category of outcomes.
We can’t live our investment lives by what’s and if’s. If we did not take any element of risk, we might as well not invest. We will experience zero growth but at least our principal savings will be safe. But we also would have missed a tremendous opportunity to build our wealth which ultimately is what we will live off. Taking a calculated, well-researched risk has proven time and time again successful and we will be better off Keeping Life Current.