Yahoo Finance How to Recover After Losing Money in the Stock Market
When Mike Windle met his client for the first time, the man had been sitting on $2 million in cash for six years. He told Mike he'd been convinced that the stock market was peaking in 2012, so he took his gains and ran for safer ground. And safer ground is where he's been ever since.
"Since 2012, we've seen 40-plus percent gains," says Windle, a retirement planning specialist with C. Curtis Financial in Plymouth, Michigan. His client missed out on all of that waiting for a dip to buy back in. Needless to say, that client won't be telling fortunes anytime soon.
Investing blunders can be painful. And Windle's client, despite the years of missed returns, at least had the consolation of knowing he'd sold at a gain. Recovering from a bad investment can be even harder when you've taken both a financial and psychological hit.
What to do after losing money on an investment? The best way to recover after you lost money in the stock market is to invest again. Don't "stick your head in the sand and put your money under the mattress because you'll never recover that way," says Bob Phillips, managing principal of Indianapolis-based Spectrum Management Group.
[See: 7 Mistakes to Avoid With Dollar-Cost Averaging.]
And don't beat yourself up for your mistake, either, adds Bob Stammers, director of investor engagement for CFA Institute. Investors have a tendency to take one misfire and compound it by pulling the trigger on other investments.
"The loss shouldn't come into the picture anymore," he says. "It's gone." All you can do now is learn from the mistake and find a better investment going forward.
Unfortunately, as Windle's client exemplified, getting out of the stock market is often the easy part; it's getting back in that's hard. To overcome re-entry wariness, Windle uses dollar cost averaging.
Instead of investing everything at once, he has his clients wade in gradually by investing a set dollar amount or percentage of their savings each month or quarter. In this way, "you'll be buying some highs but also offsetting that by buying some lows," he says.
He structures it so his clients are fully invested in twelve months -- or six months for sums less than $10,000.
That said, if you can stomach it, you're typically better off putting your money in all at once. "The reason for dollar cost averaging is more psychological; to take the emotional fear out of reinvesting, especially if you've just experienced a bad loss," Windle says. It generally has a negligible impact on your long-term returns.
Should I buy back into an investment that's rebounded? Watching an investment you sold at a loss rebound can be the most painful part of investing mistakes. So painful that many investors fall into the trap of panic selling every dip and buying back in on every upswing. As a result, "every cycle of trades, they're losing money," Windle says.
If you're going to get back into the same investment, do so because you think it's a strong long-term investment at its current valuation, not because of recent price movements.
Reinvesting should be a "purely independent decision" from your previous experience, Stammers says. Does it make sense to buy at its current price?
Review analyst reports, SEC filings and the CEO's letter to shareholders to gain a better understanding of the company's prospects and business model.
[See: 8 Reasons to Play it Cool When the Market Drops.]
"The best way to recoup from a loss position or bad investment is to be disciplined on the front end," Stammers says.
People often buy an investment without understanding what drives its returns, Phillips says. Then when it goes down, they have no basis for determining if that negative movement is just normal market activity or a signal something is fundamentally wrong with the company.
How to know when to sell an investment at a loss. Stock price declines are only paper losses until they're realized. There's always the chance you could recoup if you just hold on long enough. After all, everyone has bad days -- or quarters. Or years.
Even company performance can be cyclical, Windle says, pointing to how many companies have bad second quarters as an example.
If a company has a bad quarter, look back over the past five or 10 years to see if it's a self-correcting trend, he says.
"Generally, there's no reason to sell unless it's no longer serving the role you intended for it in your portfolio," Stammers says.
If that happens or if there's been a fundamental change with the company that will impact long-term performance, don't wait: sell, sell, sell.
Too often in their determination not to sell at a loss, investors end up being worse off over time, Phillips says. As long as your money is tied up in a sinking ship, you're losing the opportunity to make money elsewhere.
"It's that opportunity cost and the missed compounding over time that ends up being a bigger loss than the original investment," he says. If there's a better investment available, take the loss and move on.
Where to invest after losing money in the market. One of the biggest mistakes investors make is trying to get all their money back at once, Windle says. They'll buy into an investment they think will regain everything they lost in the next six months. As a result, they often invest in something excessively risky and instead of making back their 20 percent, they lose another 20 percent, Windle says.
If you have a long-term goal, "you don't need to gain it back in six months," he says. "Even if you're one year out from retirement, you won't need all of your money at once." You can structure your portfolio to get the return you need over time without taking unnecessary risk.
[See: 10 Long-Term Investing Strategies That Work.]
Success is not about the highest return, Phillips adds. It's about finding the investments you can stick with that are the most likely to provide the return you need to achieve your goals.
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