You invest in the hope of building long-term wealth. When the stock market is doing well, you can feel great when your accounts increase. But when you enter a period of loss, it can be very scary.
No one likes to lose money, but negative years of stock market returns are inevitable. And while you probably can’t completely get around bear markets, you can avoid losing money by doing these five things.
1. Set realistic expectations
When you invest, your expectations of what you could gain must be realistic. And sometimes measures like average rates of return can be misleading.
For example, if you invested in stocks with a large capitalization between 1926 and 2020, you would gain an average rate of return of 10.2%. And if you won that rate of return for 30 years, the $ 100,000 invested would rise to $ 1.84 million.
But over the same time period, you would have gained 54% in 1933 and a low return of -43% in 1931. If you are investing for the first time in a year, you may lose out.
Understand that your return will not be linear, but instead the average of positive, negative and flat incomes is important. And understanding this can help you endure the bad years.
2. You know the difference between realized and unrealized loss
When you look at your account balance and see that it is lower than the previous month, you may feel as if you have lost money. But the numbers you see in your statement or when you log in to your account are called unrealized losses or gains. These numbers change for better or worse during the day of trading and are considered actual losses or gains only when you realize them by selling your holdings.
For example, if your account balance was $ 10,000 last month and you lost this month, it may now cost $ 9,000. But you would actually lose money only if you sold this investment before it returned to its original value. In the long run, the stock market has always grown and the value of your investment is also a must, as long as you stay invested.
3. Have a suitable time horizon
How soon you need your money can affect how well you keep your money invested during stock market crashes. If you will not need your money for 25 years and suffer a 30% loss, you can reject it, knowing that the value of your account may return to that value in a few years. But if you plan to use the money next year, you may panic at the idea of losing any of it.
Before you invest a penny, think about your time horizon. And the closer it is, the more conservatively you need to invest. Without the threat of missing your target, losses may not seem so devastating and you will be less likely to give up investing due to a short-term decline.
4. Control your emotions
Controlling your emotions is not an easy task and when you lose money, you may feel as if it will last forever. But the downturns have never lasted forever. Learning how you can control your emotions when you feel this way can be the difference between experiencing the return of subpairs that are lagging behind, or keeping pace with them.
When you feel like the sky is falling and you feel like you can’t see the end of it, reviewing past stock market adjustments can be helpful. Even during some of the most extreme loss periods, investors who stay on course often recoup their losses within a few years. From 2000 to 2002, if you invested only in large-cap stocks, you would lose a total of about 38%. If you had $ 100,000, it would have dropped to about $ 62,000. But by 2006, you would have gotten all your money back and been slightly ahead.
5. Invest according to your risk appetite
How do you deal with instability? Do you hardly notice it and realize that this is a normal part of the market cycle? Or does it make your stomach fall every time it happens?
You can earn more in the long run if you have more aggressive investments, but in a year of losses these types of investments can also lose more money. And if the losses seem too great, these investments may be too risky for you.
If that happens, it may be harder to stay invested. Making sure you invest in accordance with your risk tolerance can help you prevent this. You also need to find an asset allocation model that meets your risk appetite, even if it gives a lower average rate of return.
Investing should help you achieve your goals, instead of moving you away from them. Although regularly increasing or decreasing the value of your account is normal, you do not need to lose money. And controlling your fears, securing the right investments, realistic expectations of how your accounts will develop, and the time frame in which those gains will occur can help you avoid it.