No one likes to lose, especially with money. In fact, researchers have found that our desire to avoid financial losses can be twice as powerful psychologically as our interest in achieving an equivalent gain.
It’s no wonder, then, that many investors avoid financial losses by investing in “safer” investments with limited upside potential. Or, by not selling an investment below the original cost paid, because doing so would “lock in” a loss.
If you have a tendency toward “loss aversion” (the technical term for financial loss avoidance), you may be missing out on significant financial gains. For example, in 2017 alone, the S&P 500, an index of 500 stocks considered a leading indicator of U.S. equities, has increased more than 17 percent.
Playing it “too safe” can also cut into your money’s purchasing power, if your returns fall below the rate of inflation. For example, if most or all of your money is in a money market savings account currently earning around the national average (around 0.20 percent), you are losing ground to inflation, most recently 2.2 percent as of September 2017, according to the U.S. Department of Labor.
Rather than limiting your investment potential due to a fear of financial loss, consider instead the following alternatives:
Think of market downturns as sales opportunities. If your local gas station started selling fuel at a 10 percent discount, there would likely be long lines of motorists wanting to buy. Why then be nervous if the stock market drops 10 percent? Rather than thinking of this market decline as a loss, consider the investment market “on sale” and invest in securities you like that are now that much less expensive.
Know why (and when) to sell. Rather than immediately selling an investment solely because it has decreased in value, or holding on to an investment loser for far too long, think instead of the fundamental reasons that you initially purchased this investment. If any of these fundamental reasons for buying have significantly changed, then sell your investment; if not, then seriously consider keeping it.
Limit your financial media exposure. The financial television channels thrive on negative news, as it drives viewership. While it’s OK to check the financial news occasionally, don’t let that information, particularly if it’s gloomy, necessarily deter you from pursuing your long-term financial plans.
Check with an advisor. Having a trusted financial advisor means you have a great “sounding board” to discuss your investment decisions. Let them know of your hopes and concerns, and act accordingly based on their sound input.
Your Seaside Client Advisor can help you determine your optimal investment strategy based on your unique goals, timeline and risk tolerance.
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