If you've seen massive losses in your net worth during the bear market, you undoubtedly want to earn your way back to breakeven, at least. Yet if you dial up the risk level on your portfolio in a last-ditch attempt to reach your financial goals, you're just as likely to end up a whole lot poorer.
Don't go overboard
Now it's true that you've heard a lot of people talking about what a great time it is to get back in the market. With the overall market still trading at levels around half its 2007 highs, it's a lot easier to justify buying stocks now than it was back then.
Moreover, particular segments of the market present some really attractive investing opportunities. For instance, after seeing oil lose two-thirds of its value, some believe that it's time for energy stocks like Chesapeake Energy (NYSE: CHK ) and Chevron (NYSE: CVX ) to reverse their losses of the past year and give investors a second bite at the trading-profits apple.
But don't kid yourself. While anything's possible, you definitely shouldn't expect the quick road to recovery that victims of the 1987 stock market crash enjoyed -- or even the relatively short five-year period it took for stocks to make new records after the tech bust hit bottom in late 2002.
Going small
One promising way you might think to earn back your losses in a hurry is by taking on more exposure to small-cap stocks. After all, more mature companies may have some growth prospects left, but they're typically small compared to the potentially explosive growth opportunities among younger businesses. If you latch onto a great stock before anyone else has heard of it, the sky's the limit as far as possible stock gains are concerned.
But small-caps carry big risks. And as cheap as a stock may seem right now, it's always possible for its shares to fall further -- and cost you most or all of your original investment. Moreover, if you're trying to get rich quick, you're more apt to make mistakes like doubling down on a dubious stock or ignoring the warning signs that perhaps your initial research missed something important. That's a lesson that investors in everything from Las Vegas Sands (NYSE: LVS ) to AIG (NYSE: AIG ) have learned the hard way.
Buy what you'd buy anyway
The better way to earn back your losses is by following the same investing strategy you'd ordinarily use. So if falling stock prices have left you underexposed to equities, then rebalancing to increase your allocation back to its normal levels will help you take more advantage of a rebound when it comes.
Of course, one question that comes up when you're rebalancing is whether to buy the same stocks that created the losses in the first place, or instead find new stocks with arguably better potential. Although every investor's answer to that question will differ somewhat, you'll generally want to take the opportunity to fill in gaps.
So if you've loaded up on defensive plays during the recession, a good old-fashioned growth stock like Google (Nasdaq: GOOG ) could power up your portfolio, as the economy starts growing again and the search giant continues to find ways to cash in on its leadership role. Similarly, if you've stayed fully invested in growth stocks, bigger value-oriented stocks like Wal-Mart (NYSE: WMT ) or Coca-Cola (NYSE: KO ) can add some stability to your portfolio without sacrificing chances for capital appreciation.
Whenever you lose money, you're more likely than usual to respond emotionally in ways that you'll later regret. As hard as it is, the best thing you can do is to forget about the losses you've suffered and stick with a solid investing plan. In the long run, the great opportunities that lower share prices are offering should help you offset the hit you took on stocks you bought at record highs.
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