When things go wrong
Here is the one million question: what to do when you are losing money in the market? Sooner or later, it will happen. So it is better to think about it in advance to avoid pain in the future. If you are trading, you should have your stop-loss in place. Hence, in this case, it is somehow easier. What if you are a long-term investor or you use a buy and hold approach without stop-loss? This is more challenging.
The idea of long-term investing is that you are confident the asset you are investing in will eventually go up in price. And the key word is eventually. For example, you can buy the SPY ETF tracking the S&P500 Index in the US market. Sure, in the long term it will go up, but there may be periods of a huge decline in price. Remember the 2008 crisis? So what should you do if this happens to you? There are a few ways people usually react to that:
- watch continuously the price going down hoping that the pain will end soon. Not really the best way to proceed
- the previous point + blame someone or something else (e.g., the market, the broker, the economy). Even worse
- decide to sell to cut losses. Well, at least in this case you are doing something. But is it really a good idea? Weren’t you supposed to hold for the long term regardless of drawdowns? Do you want to move from investor to trader now?
Point 3 is one of the reasons why investing may be simple but not easy. As a matter of fact, your emotions are likely to affect your judgment. And this applies not only to investing but to many areas of your life. That is why some of my previous articles explained how NLP could be used to address this challenge.
But let’s go back to the main question. What should you do? If you are a long-term investor or buy-and-hold, you can do two things: hedge and/or focus on new opportunities. Let me explain.
Hedging, in this case, means performing some operations that will allow you to make money while you are losing on your current investment. For example, you could use options, short-selling, or inverse ETFs to temporarily mitigate the drawdown (if you are not familiar with these terms, you can have a look at this video).
On the other hand, you can look for other investments, possibly not correlated with what you already have in your portfolio, that will make money while you are losing on your current positions. With ETFs this is possible because you can access a wide range of markets, from commodities to bonds, without the huge capital requirement of Futures.
To summarize, the bottom line is that during a period when you are losing money, you should not focus on the negative. NLP can help. If you really cannot withstand it, then look for new opportunities to make money. If you do not know how to do it, then it is the best time to learn. This way, you will also shift the focus from the pain of losing money to something more rewarding.