How To Handle Tremendous Investment Losses

This is a guest post by DebtKid. DebtKid writes about his journey to get out of debt, and achieve financial stability. He runs a small software development company in Seattle as well as working as Product Ambassador for LendingClub.com.

How did your stock portfolio do in 2008?

Unless you were shorting, I imagine you got killed. 2009 isn’t faring much better so far. Maybe the markets will turn, maybe they won’t. Regardless…how do you handle, emotionally, and financially, the tremendous losses you’ve already got?

It’s just money, right? Yeah, right.

The answer is not to shrug it off like it doesn’t matter. It does matter. Those losses are real (at least on paper, and lets be honest, in your mind as well) and it’s a major blow to lose 50% of a 401(k) that you’ve been so diligently sacrificing to fund the past few years. It just plain sucks.

Having had some major investment losses in my life at a pretty young age (over $300k in less than three years), I have some tips on dealing with big losses.

1. Let go of your old account balances

No matter how hard you wish, your account isn’t worth what it was a year ago. No amount of anst will make that money magically come back. You have to be able to accept your new account balances and the reality that they represent.

2. Realize you cannot control the stock market

When you give other people control of your money (via a 401(k) plan, or an investment advisor, or even an investment in a company you have no pull in) you have to realize that you have now lost direct control over how that money is put to use. Sure, you can always sell your stock, but once you’ve investing in a company, unless you’re Carl Ichahn, you are putting your faith in that company’s business and management team.

3. Traditional “investing” may not work for you

Jeremy had a great article here recently about invesitng in yourself. I’m a big proponent that you’ll almost never find a better investment than one you directly control. That can be you investing in your own education, professional development, or maybe that means starting a business. There are plenty of ways to “invest” your extra money in yourself without putting it in the stock market and earn returns that make 10% look awful.

4. Redfine how you think about risk

Stocks are risky. No matter how well diversified you are, there is risk involved. If your losses have made you so turned off from stocks that you cannot sleep at night…it might be time to rethink your level of risk. There is nothing wrong with staying out of the stock market. I’ll never be an active investor in stocks probably ever again in my life because it just wasn’t for me.

5. Learn to trust yourself

For me, it’s ten times more risky for me to invest in a stock than it is to invest in myself through my business. When I invest in myself, the buck stops with me. The success of my investment is almost completly dependant on myself. And frankly, I trust myself way more than any big-wig CEO or fancy pants investment advisor.

Who would you rather trust? I’ll choose myself every time.

6. Don’t hide losses

The biggest thing you can do to absolutely destroy your emotional health is to try and hide your losses from a spouse or your family. It will absolutely eat you up inside. The reality is that we all make stupid investments on occasion. We can’t all be Warren Buffett (and even Buffet got killed last year).

7. Still like stocks? Quit watching CNBC and think long term

If you still want to stay in the stock market even after tremendous losses — good for you. Your fortitude to handle loss is admirable. But for gosh sakes, turn off CNBC and quit checking stock prices every day. If you are truly thinking long term, you need to avoid the day-to-day media monster.

How are you dealing with large losses in your investments?

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

23 comments
Geordie
Geordie

I don't care how much the economy has "rebounded." I will never invest in stocks again. I just got word a few days ago that a small community bank I had inherited a lot of stock in, is going bust. It's failing. For me to ever invest in stocks again would be like getting back together with an abusive spouse. It's unhealthy, and just the wrong thing to do, and only spells more trouble down the line. Investing in the stock market is not for the lower or middle class. Creating ways to invest in yourself is the only real way to go.

savings
savings

If I hadn’t learned that stocks just aren’t my thing…as a a professional trader I would be seeing this as a potentially buying opportunity. It’s really the 50+ crowd who are thinking…”what is really goping on..

Geordie
Geordie

In January, right before the Inauguration, I cashed out of the stock market, (I'm with Merrill Lynch), thinking I would re-invest (my advisor was on board for this). Then, I just thought I'd had enough of the roller coaster ride (after loosing 200k in the fall). The loss really made me feel sick to my stomach. So I've put most of my money in a 6 month CD (@ 2.5%) to give me a solid, safe return while I re-think and re-imagine how I want investing to be for me (I'm 41 years old). I don't have a large income (I'm a teacher)... this money was an inheritance I received 3 years ago and is really the only nest egg I'll ever have, as, like I said, I don't have some big six figure income to just keep replenishing the losses with. After drinking the Merrill Lynch Kool Aid that told me proper diversification would essentially protect me from big losses, and having my advisor work with me to discern my level of risk, which wasn't very high as it turns out - only to see that just get blown in the dust when last October hit - I don't know where to turn anymore, or who to trust. Could I ever trust a Financial Advisor again????? They all sound so smart, so confident. They have so many charts and graphs, facts and figures (and Mr Meef I'm talking about you here, too)... they are very convincing. But at the end of the day, they will totally let you loose your nest egg. All the while collecting their pay checks and bonuses. I'm not so naive anymore... and it kinda hurts! I want to make the most of what I have left, but I also think that anyone who is under the age of 50 really needs to take a long hard look at what has happened. Because something like this could really happen again when you are in your 60's. Do you really want to keep drinking the Kool Aid now, only to have the majority of your life savings go down the drain when you need it most?

Phil Rup
Phil Rup

@ Goran Web: I don't think it's a good idea to buy gold/silver when prices are greatly inflated and hovering around historic highs, even with the intent to sell in 1 - 3 years. This is another flavor of market timing, except -- buying in high. Disclaimer....if you think the economy will continue to decline into a very long, downward spiral, then it is still a good time to buy precious metals.

@ Eve's Bank: working the farm *is* the work. But the implication is correct, "another job" wouldn't really be practical, depending on the scale of operation.

@ SJ, Chris: It's not just the $40 Trillion...that money would have to come from somewhere, and that would likely be 1) additional gov't debt, 2) [eventually] taxes. Further, there comes a point when foreign interests are no longer willing to buy our debt - there are hints of that now. Then, if by some miracle, you raised the money, you would then greatly accelerate inflation, national debt, taxes...so the $1million in each pocket quickly loses value, and you hasten the demise of U.S. financial sovereignity. Yes, we are heading there, but I for one don't want to speed it up.

Jennifer
Jennifer

@Debtkids As long as the leave valuable comments, I don't think its spam. Have a look at the whole comments on this post each one of them comes from a site. I do not support companies adding irrelevant comments irrespective of a Big one or small one.If HSBC want to share information that will help people by using a "product name" fine, as long as they don't repeat it over and over again in one post or site.

Great post though.

Eves Bank
Eves Bank

@ Goran Web: getting a farm? - how are you going to manage growing crops and taking care of animals? - how are you going to work at all?

Goran Web
Goran Web

@ Debtkid - How right you are! This is a bit of a first for me, seeing this! Hahahahahah

On a more relevant note all I can say is to invest in tangible commodities like gold and silver, and sit on it for a year or three. Getting your own farm and being as self sustainable as possible food-wise isn't a bad idea either.

DebtKid
DebtKid

Wow...HSBC comment spam. Banks really are getting desperate.

savings
savings

I sometimes sell cash secured puts on stocks in an up-trend. However, today’s post was dedicated to buying insurance for an existing long position.

Chris
Chris

SJ: Wow... That sucks.. Great catch! I seriously think I'm getting dumber the more I learn.

SJ
SJ

Chris: Wait was that an april fool's joke?
40 million * 1 million = 40 trillion...

My time line is I just graduated from ugrad and in grad school =)

Chris
Chris

I like one strategy I read on the Motley Fool.. It goes something like this

There are approximately 40-50 million workers age 55 and over..

1. Give each of those workers 1 million dollars to retire, right now.. Their retirement is now more secure.

2. Younger workers take their vacated spots.. Unemployment problem taken care of.

3. Make them all with a portion of that 1 million dollars buy an american car.. Auto crisis solved..

Our entire economy could be fixed for a mere 40-50 million dollars!! I don't know if it would work, but I thought it was a pretty cool idea.

DebtKid
DebtKid

Yeah, if I hadn't learned that stocks just aren't my thing...as a 25 year old I would be seeing this as a potentially buying opportunity. It's really the 50+ crowd who are thinking..."holy crap...what now?"

Charles
Charles

What is your time line..? That is the deal maker.. People in their twenties and thirties should have a field day buying.. Those boomers? sucks to be Us.

SJ
SJ

Yay it's a sale!!

Let go of risk and hope for the best (long-term lol)

Recall risk-aversion is (somewhat) irrational. You're taking the best long-term bet (not right word ehhh) so ohwellz!

Jen
Jen

Mr. Meef, I'd probably be one of the few then who wasn't angry at you or giving you grief. I actually do see this as a huge opportunity to buy my future at a discount. Unfortunately, I was a bit too leisurely in building up my emergency fund, and given the rampant layoffs I decided to cutback my 401(k) contributions so I could aggressively save cash in my emergency fund. However, once I hit my goal, which I should by the end of this year, I'm maxing out my 401(k). Also, I am still contributing enough to get the full match from my employer.

I do like your suggestion to direct future contributions/investments to safer funds instead of selling off current holdings and reinvesting. At least your method won't lock in the loss.

Mr. Meef
Mr. Meef

As a retirement plan education consultant I am taking some serious lumps out there speaking to approximately 250 different groups/year nationwide. These conditions have made me prove my worth and I do my best to focus on fundamentals. One way people can stop the bleeding is to direct future contributions into safer investment options and leave their existing balances alone to lick their wounds. As a Gen X'r this is a golden opportunity to buy low but many people's nerves are shot and feel they're throwing their money into a hole. History shows we'll get out of this, but it's anyone's guess as to when. Look at the past 5 quarter's and compare how many shares you accumulated versus the 5 quarter's prior to that. You're looking at about double the amount of shares purchased if you were buying all equity investment options. Does your plan offer portfolios or a managed service? These can help allocate your money in terms of a risk profile consistent with what your gut allows you to withstand. It's safe to say about all people that are upset haven't taken any action to adjust their accounts and I have to live with that target that's painted on my jacket. It's a good thing I have a healthy self-image...

Chris
Chris

Sell.. Take your lumps (and your capital loss carry-forward) and reevaluate your investments. Is your allocation still appropriate for your risk profile, needs, and time horizon? Should you think about divesting (if possible) into hard assets such as real estate? Aside from erasing those nasty -43% return figures on your statement, it is good to take a deep breath, take a look at the big picture, and move forward.

Good luck!

Miranda
Miranda

I agree that thinking long term is probably the way to go. It may be the "boring" way to invest, but it sure is more stable.

ObliviousInvestor
ObliviousInvestor

"Quit watching CNBC and think long term"

I think this is probably the single most important investing-related message people can hear these days.

Great job!

Baker @ ManVsDebt
Baker @ ManVsDebt

"Still like stocks? Quit watching CNBC and think long term" - I literally laughed out load when I read this. I thought this was a great article for people who are scared and wondering how to deal with these losses.

I'm a big advocate in not timing the market. Just keep chugging away. Don't pull your money out now, and don't leverage your house and dump a bunch in.

This whole situation has certainly brought proper diversification back into the light!

GoForexYourself
GoForexYourself

This month, I am changing my Risk/Reward strategy to 1:1 . If I see my trade going against me it will give me the option to close the trade with minimum loss.