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?
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.