How to deal with losing money and how to leave emotions at the door.
This is a big deal in the world of investing, hundreds of books talk about emotions in investing and how your psychology can affect your profitability.
Losing money sucks and can be infuriating on the other hand making money feels like we’re on top of the world and we know everything about investing. Both are dangerous mindsets. I’ve lost money in the Stockmarket and I’ve made money, I try to keep level headed with my emotions and learn from both scenarios. I’ll give you a few examples.
I’ve lost 90% of my money before. In fact it can be argued that I still am losing 90% of my position because I haven’t sold it yet. XLMedia (XLM) was a company I saw lots of positive news about roughly 3 years ago and researched it myself and was happy with what I found, lots of potential growth opportunities. I then looked at the technicals and saw a strong, steady increase in price over a fair period of time, backed by a healthy amount of volume. I ended up buying XLM at its all time high and within 6 months I lost 50% and since then it has slowly but consistently fallen, leading to a 90% loss in my position.
This was unbelievably frustrating because I did my due diligence like I normally do and was happy with my decision. Unfortunately, the existing revenue streams they had started to dry up and they struggled to capitalise on their new growth opportunities.
It’s safe to say I treated this as a very important lesson, a £600 lesson. I learned to always set a stop loss on large positions and to have slightly more diversification within my position allocations. I’ve only ever lost money on 4 trades during my 7 years of investing. The other 3 ranged from 5%-20%. This was my first loss and my biggest. I think it’s safe to say I have learnt from my very expensive lesson.
After losing big money like this it is very easy to slip into the gamblers mentality of reloading and going all in but that never works out, so it’s best to accept the loss, learn from it and move on. Don’t try to force anything. I know this may not be as easy as it sounds for some people but you almost have to filter real money from investing money. To me £600 used for investing feels very different than having £600 in the bank. £600 in the bank feels like a lot and you can almost think of all the things you can buy with it whereas £600 for me to invest feels like £60, because I know investing is extremely beneficial so for some reason in my head, using money for investing feels so much easier to part ways with than it does for spending. Thinking of money this way helps me when I lose or make money because it doesn’t actually feel as much as it is if you know what I mean.
Conversely, when making a lot of gains with an investment it is easy to become overconfident and think you have the Midas touch. This is a very good way of losing money, overtrading once you’ve had a big winner. That’s why my mentality of investing money feeling smaller than spending money is useful, because I don’t think of my gains as big as they actually are.
Now more than ever it is important to not be overconfident in the market, yes it is easy to make money but at some point that will change. Don’t be overconfident, take your emotions out of investing. Be organised and clinical. Have a plan and stick to it.
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