How to cope with losing money in the stock market?
Top 5 ways to overcome emotional investing
When a market is in an upswing, everyone believes it has nowhere to go but up…. think “Dogecoin to the moon” for any crypto fans out there!
I have fallen into this trap recently, making the unfounded assumption that my stock portfolio can only go up at all times.
When in fact there is no reason to assume this – the market can and will go sideways and god forbid even sink into a declining bear market.
This eternal excitement and optimism from seeing your investments go up and up may even start to feel euphoric, and that euphoria can lead to making investments in overheated markets due to the emotional fear of missing out.
This euphoria however good the feeling, though, those are the exact times when it may in fact be better to hold or even sell.
As Warren Buffett famously said:
“be fearful when others are greedy, and greedy when others are fearful.”
This exact scenario played out during the last financial crisis – we saw it in 2007.
Take the US housing market, you could buy and sell your home within weeks because of this euphoria driving the belief that houses would only continue to appreciate and that everyone would become rich on the back of Real Estate.
That feeling of euphoria is one of many emotions I experienced as I started my investing journey back in my mid 20’s and feelings I still experience today.
As a Millennial I feel the best way to present these array of investor feelings you will inevitably experience on your journey is in the form of emoji’s.
Yes, emoji’s! My favourite form of communication.
Because why not make it fun in the process!
Thanks to Forbes – I can now do this.
The Millennial Emoji Investor Emotion Spectrum
Euphoria is on one extreme side of this investor emotional cycle. While panic, anger and depression are on the other.
Trust me, I have experienced all of these emotions – one such recent example is Alibaba (BABA) – for anyone who knows the impact the Regulatory environment in relation to Chineses stocks is having right now.
This stock has brought me right through this cycle after declining 40% over the last few months. I would say I’ve now passed through the depression stage into hope – and actually followed my own advice and continued to invest in the stock as I believe in it long term.
But this cycle is what you as an investor are bound to experience – the good times
won’t may not last forever. (reading back, this sounded a little ominous)
So be prepared when these emoji’s sum up your feelings as you checkin of your brokerage app.
This array of emotions is difficult for many to handle, especially if you don’t anticipate them coming at some stage in your journey.
They cause people to panic sell as they only see further declines in the market and pull back, or even exit markets entirely, not realizing that that could be the most opportune time to double down and buy.
Follow Buffet’s old adage and be greedy when others are fearful.
But I admit this is really difficult.
When you are down $20k in a single day, and the sh*t has really hit the fan.
All you want to do is exit your position and run.
One of the most dramatic examples of this was in the depths of the 2008-2009 financial crisis as investors exited stocks as an asset class in their droves,…think the great wildebeest migration across the Serengeti as an accurate visual of how investors were migrating out of stocks.
Then stocks started to recover in 2009 and investors because of their fear didn’t actually return to stock until Q4 2020, losing out on the vast majority of gains during this period. The US bank sums this up nicely here if you want to read more.
Stages of investor reactions during times of uncertainty
There are 3 common stages that sum up how we as simple humans react during times of uncertainty. Because we as humans are inherently flawed. One shining example is my inability to not visit the fridge every 10 mins when I am working from home. I literally have zero control over this. I digress…
This uncertainty such as what is occurring right now with the never ending Global Pandemic and what has caused my net worth to decrease from October to November, I provide a breakdown of my monthly net worth updates here.
Caveat…. Not everyone will experience each of these stages but they are the most usual representation of what people feel, which drives how they act.
– Reactionary: We as investors feel the need to take immediate action at the first sign of market uncertainty, by purchasing or selling stocks without actually determining why based on fundamental reasons. We don’t see our original investment as having a long term time horizon and have little patience and therefore the reaction is in the same vain. Short sighted and impatient.
People with a higher level of anxiety may get stuck in this phase if they keep reacting to every news headline out there or newspaper article highlighting the upcoming stork market doom!
– Liquidity: This reaction is driven not by news headlines, but more so by certain requirements that make you sell your positions.
For example if you are investing using margin (i.e. money you have borrowed)- they are certain limits you have to stay within imposed by your bank or lender. If your investment decreases in value, your overall margin % increases, meaning the percentage of money you have borrowed versus your portfolio size. This may require you to sell your position in order to stay in lane. This is just one example of a liquidity reaction. One of the reasons I don’t mess with margin, if you want to know more about forced margin calls – check out this article.
– Fundamental: This stage is shaped by people who are not driven to make rash decisions to buy and sell stocks based on headlines. They instead rely on sound fundamental analysis such as earning reports and future expectations. With the aim of purchasing any holding a stock based on the long term, not short term forgotten in a day meme stocks.
If you haven’t figured it, I want all of my investor reactions to be fundamental in nature – and you should too!
Easier said than done, I am still working on it too.
I want to exist my Alibaba position so bad and run for the hills – but looking at fundamentals (excluding the regulatory risk) this stock will bounce back.
Although nothing is a sure thing and it might keep plummeting down, but at least my decision making process was sound, rather than relying on a news headline or something I overheard from a friend.
So how should you prepare to ensure your emotions are kept in check during guaranteed periods of stock market fear and fever?
Top 5 Ways for how to cope with losing money in the stock market
Hopefully 2022 is full of as much stock market euphoria as 2021. But if it’s not – how should you prepare to ensure your emotions are kept in check during guaranteed periods of stock market fear and fever?
Here are 5 ways to help you cope with losing money and actually to control your emotions. These tips will save you literally thousands of dollars. (if not a hell of a lot more depending on your portfolio size)
1) Take a slow deep breath and go for a walk
Okay this might sound silly but honestly, to get out of new jerk reactions from blazen headlines – take deep breaths and if you can, grab a KitKat and go for a walk. Or better yet sleep on the decision first.
You will reduce your heart rate, your head will be clearer and you will make more informed decisions.
The last thing you should be doing is having heart palpitations, aggressively trying to click sell sell sell on your mouse pad.
2) Learn from the past
When the stock market finally tanks, and it will.
Some younger investors out there, including me, have only witnessed a bull market and are more likely to react emotionally.
But the past offers lessons time and time again.
Aim to follow a long term hold strategy over broad based index funds or well established stocks always wins out.
Just look at what came over the tech stock market crash of 2000/2001 or the Financial crisis of 2008/2009. There are so many examples in the past to look back on and learn from.
There is also one common theme that emerges after every crash in history, the market recovered and went on to achieve new all time highs.
Time in the market beats timing the market every time….wow that’s far too many time references in one sentence.
3) The younger you are the better
Okay this isn’t some ageist jibe.
But actually a bear market will actually benefit younger investors and millennials more than our retired forefathers.
Why? Because it gives greater opportunity to actually buy more of the stocks and ETF’s you like at a cheaper price.
It’s like someone offering you a Black Friday sale on stocks.
Offering you 20, 30 and 50% off your favourite products.
Buy them cheap and hang onto them for the long haul.
If you are older and on the road to retirement you will need to adjust your plan and ensure further to achieve greater diversification
4) Diversify, Diversify, Diversify
You know I am always harping on about diversifying in my blog and you guessed, it makes our top 5 list here as well.
Your portfolio should include investments that have higher returns if a recession hits along with stocks that perform well if the good times keep rolling.
Take consumer staples stocks, generally they perform well during recessions as they sell household necessities that everyone needs, even more so during recessionary times as people stay home more.
Make sure to read my post on the perfect dividend portfolio for the stocks I am investing in to weather the storm if and when it does arrive, while also taking advantage of growth sectors and strong dividend returns.
5) Consult with an expert or at least do your research
Consulting with someone who has been there and done it over many years and decades will help you.
Use them as a sounding board. You don’t have to pay someone in a suit to consult with.
There are so many people out there, use your network, use online forums. Reaching out will also slow your decision making process and you’re more likely to make a rational decision.
Remember you’re not a day trader, you are an investor. There is a difference.
You should always be reevaluating your portfolio and your risk level. Ensure your stocks are well diversified and seek out advice from experts in investing to offer feedback given your individual criteria e.g., age, time horizon, asset allocation.
Continue to learn about the market and the boom, bust cycles it goes through. This will reduce the impact of emotions on your decision making process.
As I noted earlier, learn from the past. You should always expect and accept the uncertainty and volatile nature of markets.
The more comfortable you are with this, the more rational your actions will be.
What are your horror stories?
Tell me in the comments when you have reacted in a panic and sold or bought a stock you regretted looking back.
Everyone has some stories in this regard, I’m interested to hear them.
As always, I hope you find some of these areas helpful in your own journey to whatever your goal is. Make sure to follow along on my journey on how this thing called life and my goal of financial freedom works out, I keep my net worth updated here.
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Catch you soon,