How To Cope With Stock Market Losses

Eventually, the stock market will lose value. The experts will call it a “correction,” but it will feel like a crash to most investors. Not surprisingly, most people feel a lot of stress and anxiety when their portfolio values slip. Who wouldn’t freak out at least a little when they “lose” thousands of dollars overnight?

The next stock market loss will come. No one knows when, but we all know that it will happen. Preparing now can make it much easier for you to cope with stock market losses. Instead of feeling frustrated and desperate, you can take action to position yourself for recovery and long-term growth.

Use the following strategies to help you cope with stock market losses and do everything possible to make the most of a bad situation.

Diversify Your Investment Portfolio Now to Protect Against Loss

It’s unlikely that every industry will collapse at the same time. Granted, events like the Great Depression and Great Recession created circumstances that made it nearly impossible for most investors to thrive. Those situations rarely happen, though. Diversifying your portfolio might not protect you from widespread economic collapse. However, it can give you significant protection from the market’s ups and downs.

Reliable ways to build more diversity into your investment portfolio include:

• Buying into exchange-traded funds (ETFs)
• Adding funds and indexes to your portfolio
• Investing in real estate, either by purchasing property or using real estate investment trusts (REITs)
• Buying stocks in more market sectors, such as technology, materials, energy, healthcare, and consumer staples.

Make sure your portfolio also has diversity that protects you from excessive risk. During the early stages of your life, you can probably afford to invest in high-risk opportunities.

As you get closer to retirement, you will want to lower the number of high-risk investments in your portfolio. Take some time each year to review your stock portfolio and determine whether you need to increase or decrease high-risk investments.

Recognize That You’re Not Really Losing Anything

Unless you’re in retirement and rely on investment returns as your major source of income, you don’t need to worry about falling prices. It’s easy to confuse a stock with its price. The reality, though, is that you will always own those stocks – as long as the company stays in business, of course.

An example might make this reality clearer.

Let’s say you buy 100 shares of Apple Inc (AAPL) today for $155 each. Excluding any fees, you spent $15,500 on a high-performing stock that you believe will earn you strong returns for years.

Over the next year, Apple releases products that everyone hates. Each new product pushes the stock price further down. One year after investing, Apple’s abysmal performance means that your stock trades for $15 per share. In total, your 100 Apple shares come to just $1,500.

There are two ways of looking at this. One perspective says that you have lost $14,000 by investing in Apple. The other perspective says that you own 100 shares of Apple. Regardless of the current trading value, your portfolio still contains those 100 shares.

Both perspectives are correct in some ways. The second, however, takes a more realistic approach to investing. Sure, Apple had a bad year. No one thought it would happen, but it did. You only realize a $14,000 loss, though, by selling your shares. Once you sell off your shares, you know how much money you made or lost. Until you do that, the future is open-ended.

If you take a long-term approach to investing, you know to keep those shares. A few years later, Apple comes out with a new line of products that changes consumer technology.

One bad year hurt, but it didn’t kill a well-managed, creative company that always pushes the limits. Soon, your shares return to the $15,500 they were worth when you bought them.

By waiting, you haven’t lost any money. Now, there is a very good possibility that Apple’s new releases will push the share price upward. It doesn’t take long before your investment starts to pay off.

It was a rough ride, but you held tight and profited. That happened because you kept your cool and made a wise decision to keep shares in a terrific company while it went through a challenging period.

See Lower Prices as Opportunities to Grow Your Wealth

Let’s go a step further and recognize that falling prices create opportunities for you to grow your wealth. Instead of feel stressed, you could feel excited by the chance to purchase shares at incredibly low prices.

Let’s return to the previous example of buying Apple shares. This time, though, you didn’t buy the shares when they traded for $155. Instead, you waited until the company fell all the way down to $15.

At that price, you could easily afford to 1,000 shares. Since you believe in the long-term viability of Apple, you spent $15,000 on 1000 shares. Within a couple of years, the company recovered and its share price returned to normal.

A few years later, Apple has regained superiority in the consumer technology space and its stock price reaches $155. Within a relatively short time, you’ve made a lot of money. Now, your Apple shares are worth $155,000.

This is obviously good news. Just as you shouldn’t let market losses affect your feelings too much, you also shouldn’t let market gains affect you too much. You own 1,000 shares of Apple stock, which is a great investment. The full value of that investment isn’t realized, though, until you sell your shares.

Whether prices go up or down, you own the same assets.

How To Cope with Stock Market Losses: Conclusion

It’s highly unlikely that Apple’s stock will ever behave this way. The example does, however, show why it makes sense for you to remain calm when the stock market moves suddenly. In many cases, selling your shares is the worst thing you can do because you sell them to long-term thinkers who expect the price to go up.

Instead of feeling overly stressed, create a portfolio that can withstand volatility and use low prices as chances to buy high-quality shares at a discount.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.