Financial losses aren’t as devastating as losing a human life, but they can still cause considerable pain, often outweighing the excitement of financial gains. However, it’s nearly inevitable to avoid such losses, so here are some tips that can help you cope and improve your investing skills.
In his book “The Psychology of Money,” Morgan Housel dedicates a chapter to wealth, greed, and happiness. He emphasises that our behaviour during both good and bad times, especially the bad, plays a significant role in how well we manage money. Housel explains that pessimism has become the norm, which is why losses tend to be remembered more than gains. He further states that success, loss, and volatility are all part of the journey towards long-term growth.
“In investing, you must identify the price of success, volatility, and loss amid the long backdrop of growth—and be willing to pay it,” he said.
Housel also emphasises that emotional control is crucial for successful investing, highlighting that even geniuses can become financial disasters if they lose control of their emotions. On the other hand, ordinary individuals with no financial education can become wealthy by developing behavioral skills that have nothing to do with formal measures of intelligence.
Learning from experienced investors
Peter Lynch, former manager of Fidelity Magellan Fund, encourages viewing losses as learning opportunities and managing them effectively in his book “One Up On Wall Street.” Lynch advises investors to conduct extensive research on their investments and stick to a long-term strategy.
“Although it’s painful to experience investment losses, it’s important to view them as opportunities to learn and grow. Successful investing is not about avoiding losses altogether but about managing them effectively,” Lynch said.
He further stresses the importance of conducting thorough research, having a clear investment strategy, and continuously monitoring your portfolio. Lynch reminds investors that, in the long run, the stock market rewards those who remain patient and committed to their investment goals.
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Strategies for managing investment losses
Olumide Adesina, a financial market analyst and economist, shares a few strategies for managing investment losses in a post on Twitter.
Analyzing Choices and Learning from Mistakes: Adesina advises investors to retrospectively analyse their decisions and identify areas for improvement. He suggests reviewing decisions with fresh eyes after some time has passed and considering what could have been done differently in hindsight.
Recouping Losses and Adjusting Finances: Adesina suggests tightening financial belts temporarily and cutting unnecessary expenses to regain financial stability. He emphasizes the importance of saving more money to invest wisely.
Taking a Pause and Seeking Expert Advice: Adesina warns against making impulsive decisions after experiencing investment losses. He recommends taking a pause and consulting with competent and trusted advisors who can provide logical and critical problem-solving.
Diversification as a Risk Management Tool: Adesina highlights that diversification helps minimize losses by reducing correlation among investments. He advises investors to diversify their portfolios by investing in a mix of stocks, bonds, and other assets that are not correlated to each other.
Implementing Stop-Loss Orders: Adesina mentions the use of stop-loss orders as a tool to mitigate against loss. He explains that stop-loss orders automatically sell a stock when it reaches a certain price level, thereby limiting downside risk and protecting capital.
By incorporating these strategies into your investment approach, you can effectively manage losses and improve your overall investing skills
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