How to Deal with Losses in the Stock Market
Losses in stock market are normal. It is not the loss itself that matters but how you deal with it.
Q: I have had sleepless nights lately because I am worried about the market. I keep running my trades through my head, calculating what my net worth would be if I sell all my losing positions. Thinking of all the losses depresses me sometimes. What should I do? —Irene Navarro by e-mail
January has historically been a good month for stock market. For the past 29 years, the market has always rallied strong during this month at around 93 percent of the time. But this year is oddly different.
This so-called January effect is not happening. The weak opening of the market in the New Year signals a prolonged bear market in the offing.
Persistent global uncertainties in the market such as the slowdown in the China economy, fears of rising interest rates in the US and emerging conflicts in the Middle East could push the market lower.
Behavioral finance research tells us that stock market declines tend to be quicker and steeper than gains because the fear of loss is twice higher than the desire to profit.
The PSE index has so far lost more than 600 points or 9.5 percent this year and could lose some more to as low as 5,700. Of course, there will always be minor rallies on way down but the market should consolidate at some point once the selling wave is over.
If you are holding on to some stocks that are losing, should you cut your losses now or wait for it to recover?
While it is true that blue-chip stocks do recover in future because institutional investors will always buy them back when market sentiment improves, there are stocks that may never recover at all.
Holding on to these stocks believing that they will bounce back someday while your losses mount as share prices fall may be financially damaging. Perhaps, instead of hoping to break even, find out if the stock is still valuable based on its fundamentals.
What are the earnings prospects of the stock? How strong is the cash flow? How will the company support its expansion this year? How undervalued is the stock now compared to industry and market average?
If there are no fundamental bases for you to hold on to the stock, it may be better to sell it now and end your pain.
Taking a capital loss, especially when it has already ballooned, can be devastating not only financially, but emotionally. If you are the type who could not express your feelings properly, you may suffer an emotional grief that may lead you to depression.
For example, you may equate your losses in the stock market as your personal failure. The thought of losing a lot of money in stocks will always haunt you and make you feel like a loser.
You may feel anger and resentment at your stockbroker who gave you the wrong recommendation, which caused you to lose money. You may also feel betrayed by the people you talked to for investment advice. How come they did not advise you to do something to prevent you from losing?
Losing your hard earned money in stock market can be an emotional issue. You may never want to invest again after this for fear of another loss. The trauma and experience that you went through may discourage you from investing in stocks again.
If you want to become successful investor, you need to handle your losses by managing your emotions and moving on. Here are some of the things that you can do when you try to deal with investment losses:
Own up your losses. Accept that you made a mistake. Try not to blame your broker or friends who gave you the wrong tips for your losses. When you become responsible for your losses, you can make decision better.
Put your loss in right perspective. Try to recollect those times when you had the worst problem in your life and how you overcame it. Whatever financial losses that you incurred, you will always have second chance to make it right and recover in the future.
Create a better investment strategy. When you have learned your mistakes, you will make sure that you will never commit this again in the future. Come up with a better plan that will cater to your risk appetite and investment goals.
For example, if you are careful this time not to lose so much money, you can try to diversify your investment portfolio by limiting a certain allocation percentage per stock. Let’s say you will budget each stock to have maximum allocation of 12.5 percent only so that when you need to sell this stock at 20 percent loss, the total damage to your portfolio will only be 2.5 percent.
Invest in yourself. If you feel that you lack the knowledge and skills to execute a sensible investment strategy, you may want to prepare by reading books or attending seminars.
Challenge yourself to learn something new about investing. Do your research and make your own opinion. The more you learn, the better your decision making will become.
Take a vacation. If you are experiencing too much emotional stress that it is already affecting your investment judgment, it is advisable that you take a break from investing and get a vacation.
Recharge your mind and body by resting. While taking your vacation, try to review the process how you came up with a trading decision.
How did you manage your risk? How did you make a mistake? What information did you overlook?
Losses in stock market are normal. It is not the loss itself that matters but how you deal with it.
Henry Ong is a Registered Financial Planner of RFP Philippines. He is best selling book co-author of Money Matters. He also writes regularly as columnist for the Philippine Daily Inquirer.
Source: http://business.inquirer.net/205459/how-to-deal-with-losses-in-the-stock-market
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