There are few things everyone can agree on, but one of them is that losing money isn't fun, especially when you're talking about your life's savings. But it happens more often than you might think. You invest your savings in the hope of growing it for your future, then the stock market takes an unexpected turn and you're left uncertain about what to do next. Here are a few tips to help.
1. Don't make any emotional decisions
When you lose money on your investments, you naturally want to find a way to get things back on track as quickly as possible. But making a rash decision, like selling a stock based on a bad quarter, could make things worse for you in the long run.
Image source: Getty Images.
It's best not to make any decisions at all when you're stressed over recent losses. Step away for an hour or even a day and give yourself time to cool off. Then come back and look at the situation with fresh eyes.
2. Consider why the loss happened
Sometimes a bad quarter is just a bad quarter. Even large, well-established companies experience setbacks from time to time, and this can affect their share prices. But it's not always a sign of serious trouble brewing.
You always need to keep a stock's long-term growth potential in mind. Companies that are leading their industries today are likely still going to be around in a decade or two because they have strong brand name recognition and competitive advantages, like great customer service and lower prices.
But if you question a company's long-term stability or profitability, that might be a sign that it shouldn't be in your portfolio anymore.
3. Consider what to do next
What's best for your portfolio depends on the results of the previous step. If you believe a company is just having a bad quarter or a short-term setback, you're probably better off holding onto that stock. Hopefully it will recover from the loss and earn you a handsome profit.
But this might take time. You're better off not checking your portfolio daily or even weekly in this case. These short-term changes won't mean very much to you in the long run anyway. When you do check your portfolio, always remind yourself of your long-term focus.
If you decide you do need to sell your shares of a stock, decide whether you plan to sell all of them or only some. Have a plan for what you'll invest your money in instead. Remember, you need to keep your money diversified between several companies and industries to reduce your risk of loss.
If you sell your investments at a loss, make note of this. You may be able to use this at tax time to offset any capital gains you earned from selling other stocks at a profit.
How you handle an investing loss is ultimately up to you, and your reaction may be a little different each time it happens. That's OK. Just make sure you think through the long-term consequences of your decision before you actually go through with it.
