Investing is the best way to build wealth, but there are inevitably going to be some bumps in the road on the path to prosperity. In fact, it's common and normal for investors to experience losses sometimes, and often those can be big ones.
As new data from Ameriprise Financial show, more than half of all investors with at least $100,000 invested have experienced a setback that cost them $50,000 or more, with one in three incurring losses over $100,000.
While these numbers are very high, the good news is these big setbacks didn't do permanent damage for most investors. In fact, 21% of people who experienced them came back and are better off financially; 27% made a complete comeback; and 41% made a partial comeback. Just 8% indicated they didn't recover, while 3% weren't sure.
If you experience your own big financial loss, you don't want to give up on investing or resign yourself to having less money. Instead, you should follow the tried-and-true path to recovery.
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Here's how to recover after a big loss
Ameriprise also asked investors who had suffered big losses what they did to get back on track. They found that there are a few key steps that lead to recovery and future financial success, including:
- 50% of people changed their spending behavior
- 37% of people changed their saving behavior
- Working longer was an option chosen by over 25% of respondents
- Relying on emergency savings, which just under 25% leaned on
By reducing spending, you can free up cash to save and invest to facilitate your recovery. Extending the time you work also means you have more time to invest and less time when you have to rely on savings. Having an emergency fund gives you a financial cushion, so you don't end up in debt or are forced to sell losing investments to cover surprise costs, thus turning a short-term problem into a long-term one that's more difficult to solve.
Reducing your risk of big financial losses
While you can recover after a financial loss, the best option is to avoid one in the first place. Here are a few time-tested ways to minimize risk:
- Avoid locking in losses: When your investment account goes down, you may be tempted to panic sell. This is often exactly the wrong approach because you haven't actually lost anything (except on paper) until you've sold out. If you are confident in your investments and hold on through a market downturn, you'll often get your money back and then some.
- Build a diversified portfolio: Having a mix of different assets reduces your overall risk because there's a better chance some investments will do well even if others perform poorly.
- Invest only in what you understand: Warren Buffett recommends most investors choose index funds if they don't want to spend the time researching individual stocks. But if you enjoy investing and want to put in the work, you can take the time to learn about individual companies you want to own a piece of.
If you do all of these things, you may see your investment balance fall during market corrections, but if you've invested for the long term, your wealth should grow over time -- even if you experience some temporary setbacks as the majority of investors do.
