How to Cope with Financial Loss

My father’s subtle wisdom about hindsight also applies to investors. It means moving forward with the right perspective. “Remember that until you actually sell, the ‘value’ of your portfolio is always hypothetical,” says Sarah Newcomb, behavioral economist at Morningstar. You have a number of securities that could make a certain amount if sold in the market. “But were you planning on selling them all today?” Newcomb asks.

And why didn’t you sell them sooner?

Mistakes we make when we let go of money

What made you want to sell, not sell, buy, or not buy is often frustrating, stressful, and even anxious when trying to figure it out. These emotions can be a problem.

“The problem is that when we’re scared, we get upset easily when we seek more information because our risk perceptions can be influenced by aspects of the risk information itself and by contextual cues like color, graphic, and sound effects,” Newcomb says. “Several studies have shown that anxiety can make even negative outcomes appear more likely. So if you’re already afraid to seek out information, you can increase fear and anxiety — rather than decrease it.”

• Mistake 1: Making decisions under the influence of fear.
  “Loss weighs heavily on us, even more so than gain,” notes Samantha Lamas, behavioral scientist at Morningstar. Combine that with the internet and it’s easy to get caught in a cycle of anxiety, fear of missing out and bad trades, especially in the online age.

  Sentiment from the wrong source at the wrong time can easily lead to repeated appearances on the wrong side of the trade. “Information is valuable, and we as investors need to do our due diligence and research the products and services we buy before we buy them,” Newcomb explains, avoiding doomscrolling and sensation-seeking when we’re emotionally vulnerable.”

• Mistake 2: Doubting the original plan. Feelings of loss can make you doubt a well-tested strategy and cause risky assets to be rushed off. This is called loss aversion, says Lamas: “This strong bias can lead to a number of financial mistakes, such as B. to overreact to a loss, causing you to be overly cautious next time or try to take extra risks because of poor performance.”

  To limit our losses, we could feel safer and calmer in the short term, Newcomb notes: “But it may very well be long-term financial self-sabotage,” she says. “Repeated studies show that people who move their money more frequently and consistently lag behind the market and their more composed competitors.”

How to come forward from a financial loss

If you’re feeling stressed or anxious looking at a balance sheet in the red, you’re silencing the pundits and naysayers, Newcomb says. “They’re definitely not going to help put you in the right frame of mind to do your best.”

One way to get in the mood is to change the narrative. “When there is market volatility and my portfolio takes a hit, I try to reframe the situation,” says Lamas. “Market volatility can be tricky, but it can also be an opportunity to buy some quality assets at low prices.”

As you look at your loss from a new perspective, you can still look back. But be fair to yourself. “Try not to base yourself on the highest value ever estimated,” says Newcomb, “mentally attaching yourself to the highest hypothetical value these collective assets would ever have produced for you if you owned them.” Selling them all at once is basically a pain.” That all-time high is an estimate, not reality, she adds, “and I think we’re giving it too much impact on our well-being.”

When you find your financial problems weighing you down, getting out can make a world of difference. “Another thing I try to do is get out of my own head,” Lamas says, “like by going for a walk, volunteering in my community, or just helping a friend. Helping others can help put things in perspective. With a refreshed and balanced state of mind, even financial loss can seem less daunting.”

Part of regaining control of our emotional health also involves letting go. “Go ahead and grieve,” Newcomb says, “if you can’t reframe it, you may have to allow it.” If you have to sell or forfeit assets for less than you paid for them, it will be painful. In this case, it’s even important to feel and process the loss so that unresolved fears or resentments don’t negatively impact future investment decisions.” “Losses are just part of the game,” adds Lamas, “and finance may be no different . Even a well constructed portfolio with significant equity exposure loses value in about a third of the months of its life.”

For the sake of our sanity, we should also set boundaries between the investment world and ours. Lamas like to use a check-in schedule after a loss: “Suppose I’ve lost an amount in my portfolio, instead of checking it all the time, I limit myself to checking it once a day or less often. Constantly reviewing your portfolio after a loss will only lead to further stress and possibly behavioral errors later.”

• Don’t confuse bad results with bad decisions.

It’s also important to set mental boundaries when investing, so try not to take the results too personally — especially when faced with the laws of probability. Annie Duke talks about it in her book thinking in bets, says Newcomb: “Every decision we make as investors has a probability of good outcomes and a probability of bad outcomes. That’s risk. If you make an excellent decision, there is still some probability that it will turn out badly. Just like bad decisions can sometimes turn out well. A bad result doesn’t mean you made the wrong choice. If I bet you $1 million that aliens will land on Earth tomorrow, it would probably be a good decision to take that bet,” says Newcomb, “If, by some coincidence in cosmic history, aliens visit us tomorrow, that doesn’t make your decision take the bet badly. It simply means that the result fell into the 0.00000000000001% of results category.”