Investors have to deal with loss in stock market and it is unavoidable.

Losing money is painful, but when the stock market crash, it is often unavoidable.

You need to learn how to deal with the loss and move on.

Unexpected events such as the trade war between China and United States in 2019, Coronavirus (Covid-19) in 2020-2021 can cause the stock market to plunge more than 10% in just a day.

Market loss can comes in 2 ways:

  1. Immediate: The loss is clear, where the stock price plummets down like no tomorrow.
  2. Slow: The loss can be subtle, where the stock slowly but gradually drop in price over a period of time.

Losses in the stock market can also come in different forms.

There are 4 different types of market loss which are most common and we should learn from these painful lesson to become a better investor in the future.

how to deal with stock market losses

1. Paper Loss

Paper loss is the unrealized loss in an investment. Where a paper loss is only realized, or actual money loss when the investment position is closed or sold.

Thus, many investors have this mentality,

“If I don’t sell, I don’t loss anything,”

or

“It is just a paper loss, it will be alright.”

Does these sounds familiar?

Most investor believe that if they don’t sell their stocks, it is just a paper loss. If they don’t sell, the loss won’t be ‘realized’, thus ‘no loss’.

But in reality, the price of your stock have dropped.

A drop in price of a stock is not always bad.

In fact, you can perform 3 types of actions:

  1. Sell and cut losses
  2. Buy more at a low price
  3. Do nothing, wait and see 

What’s important when you are face with a paper loss, is to understand the reason for the drop in price of the stock.

Do not ignore the paper loss, but understand the situation and perform the best course of action for your investment.

How to deal with paper lost when Investing?

Many successful investor when faced with a paper loss, will try to identify the reason for the drop in prices.

Their course of actions will depends on the reason for the drop in price of the stock.

Investors buy when they believe the company’s long-term prospects is good with good financials.

The drop in price might be an opportune to add more into your portfolio at a cheap price.

Investors sell when they believed the drop in price is due to the moat of the company being destroyed and the company’s financials are in bad shape with lots of debt.

If that’s the case, it might be wise to cut your losses.

This way, you can better allocate your money for other investment.

2. Opportunity Loss

Opportunity loss in investing is the lost chance or a potential profit that was not realized because of the course of action taken did not permit the investor to earn the profit.

Opportunity loss may not sound as painful emotionally, but it is can have a huge impact to your wealth building strategy.

You might have brought $20,000 in a hot stock recommended by a cute barista down the street. After 5 years of buying that stock, the price remains around the price you have paid. Furthermore, no dividend is paid for that 5 years you hold the stock.

You might even tell yourself, “at least, I don’t loss anything holding to this stock.”

It might be true that on paper, you don’t received any form of losses. 

But in reality, you have tied up $20,000 of your money for 5 years and received nothing.

If you have placed your money at some risk-free investment such as the U.S. treasury bonds, you may have earn at least 1% to 2% per annual.

Although, this level of return don’t even beat the rate of inflation of an average of 3% to 4%, it is still better than nothing. 

What you loss, is the opportunity loss to better allocate your money to somewhere which gives a better return.

PS. Don’t take investment tip from a barista down the street.

How to prevent opportunity loss in investing?

When buying any stocks, it is always a good practice to ensure you will be getting a higher rate of return than the risk-free investment such as the U.S. Treasury Bond.

At least 3% above the risk-free alternative will be a good guide when buying any form of stocks.

With the increase of risk of each stock, you may want to have a higher rate of return.

Although, risk and the rate of return do not correlates exactly (It is totally possible to find low risk investment with high rate of return), but when you buy a stock that don’t even matches the risk-free return of the U.S. Treasury Bond, you are basically losing money and exposing yourself to unnecessary risk.

3. Capital Loss

Capital loss is the loss when the price of the stock have decreased in price from the initial price you have brought. This loss is not realized until the stock is sold. When the stock is sold, it is call “Realized Capital Loss”.

Perhaps the most painful and simple form of loss that many investor have experienced.

But sometimes, selling a losing position is the right thing to do. It is better to end the misery early then to suffer the pain of the loss indefinitely. 

What to do when your investment is facing capital loss?

Capital loss can be painful, but sometimes selling the stock at the loss allows you to prevent yourself from suffering from an opportunity loss.

Although, you may have loss some money, due to a bad investment decision.

You will have an extra cash on hand to invest in an good investment if the opportunity arises.

4. Profit Loss

Profit loss is the loss of a significant stock run-up after you have sold the stock.

Yes, you might have felt that you have “lost the money”, because you didn’t sell at the top of the market.

You may even blame yourself for selling your stock now, taking just a 50% profit, when you can sell your stock a few days later, where you can get a 80% profit.

But the fact is, no one in the world, not even Warren Buffett can time the market correctly.

It is impossible to ensure that you can successfully sell your stocks at the top of the market, and buy at the bottom of the market.

Many investors hope that the stock will recover to regain the last high, but it almost always doesn’t happen. Even when the stock, does regain their last high, or have exceeded expectation, some investor hold on to their stock till the stock plummet in price, leading to a painful loss in investment.

How to deal with profit loss in investing?

Know and understand that no one can time the market to maximize your profit is probably the key.

No one will know when to sell a stock where the stock price is at the highest, and buy when the stock price is at its lowest. Not even Warren Buffett.

Be happy when you are able to invest and gain a nice profit from the investment, don’t try to squeeze every dollar out of the stock.

Stock price almost always reflect the value of the stock, when the stock is over-valued and you are getting a good profit from the investment. It might be a good time for you to sell your stock and realize your profit.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

Wisdom of Warren Buffett

how do you handle loss in stock market

Loss in the stock market can be painful experience, but every great investors learn from their experience and grow. Keep the loss in context and don’t take it personally. Know that every great investors learn from their mistakes and get better.

Many successful investors experienced these common types of losses in the stock market.

  1. Paper Loss
  2. Opportunity Loss
  3. Capital Loss
  4. Profit Loss

Dealing with losses can be tough.

But do all babies learn to walk in just one try? Or do babies learn to walk after many falls over a period of time.

After each fall, the baby learn to balance their body with their hands and legs. Eventually, the babies start to walk and even run.

Investing is just the same.

Recent market crashes

  • Dot Com Bubble in year 2000
  • Housing bubble in year 2008
  • World recession in year 2020 cause by Coronavirus (Covid-19)

These market crash have strike fear to many investors, and many might not pick up investing ever again.

But…

Do not to live in the past, look forward and see what can you learn from the losses.

I too have learn from my mistakes when I just started investing years ago.

Journeying the world of investing as KopiBuddy, I wish to share what I learn with my readers.

If fact, if you want to learn how to prepare for the market crash and profit from it, you can read this article on “How to profit from Market Crash“.

Investing is a life long journey of constant learning.

Warren Buffett read approx 500 pages a day.

Knowledge on investment can be learn from books or articles like this one. Reading can only make you wiser and smarter, so that you too maybe able to make the right decision in your investment.

Will Durant Said:

“Education is a progressive discovery of our own ignorance.”

 

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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.

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