More than one in four investors have experienced a financial loss in the stock market that affected their overall financial situation, according to Ameriprise Financial’s January 2020 survey. Today, that ratio is likely even higher given the recent economic disruption.
“We are in the midst of a stock market correction at the moment,” says Bob Phillips, managing principal of Indianapolis-based Spectrum Management Group. “With the negative news cycle, election turmoil and civil unrest, it feels as though owning stocks at the moment is the wrong place to be.”
Periods of extended stock market volatility often make investors wonder what’s in store next, says Marcy Keckler, vice president of financial advice strategy at Ameriprise. “When the future is uncertain, investors can be prone to reacting one of two ways: becoming paralyzed and not taking prudent action, or reacting quickly from intense emotion.”
It’s natural to want to avoid losses – investors feel the pain of loss more acutely than the pleasure of a gain, Keckler says – and sometimes cutting an investment off can seem like the best way to staunch the outflow.
The question is what to do after you’ve severed that bleeder.
What to Do After Losing Money in the Stock Market
The best way to recover after losing money in the stock market is to invest again. Don’t “stick your head in the sand and put your money under the mattress, because you’ll never recover that way,” Phillips says.
And don’t beat yourself up for your mistake, either, says Bob Stammers, director of investor engagement for CFA Institute.
“The loss shouldn’t come into the picture anymore,” he says. “It’s gone.” All you can do now is learn from the mistake and find a better investment going forward.
Unfortunately, getting out of the stock market is often the easy part; it’s getting back in that’s hard. To overcome re-entry wariness, experts suggest dollar-cost averaging.
Instead of investing everything at once, wade in gradually by investing a set dollar amount or percentage of your savings each month or quarter. In this way, when you buy at a high, you’ll offset it by also buying at a low.
That said, if you can stomach jumping straight in, you’re typically better off putting your money in all at once. Dollar-cost averaging is more of a psychological Band-Aid, designed to take the emotional fear out of reinvesting. It generally has a negligible impact on your long-term returns.
In addition to staying invested, Ameriprise’s study found that investors took deliberate actions to recover money lost in the stock market. For starters, they diversified their portfolio.
“By having a portfolio that includes various asset classes and sectors, you can strike a balance as economic and market conditions change, causing some holdings to rise and others to slip,” Keckler says. “A diversified mix can smooth out your investment experience,” which may help prevent future stock market losses.
Investors also saved more to recover money lost in the stock market. “When the market is low, it’s a good idea to consider contributing more to your 401(k) or an IRA if you are able to do so,” Keckler says. “This way, you are purchasing more shares for a lower price.”
Speaking of your 401(k) or individual retirement account, don’t tap them to recover stock market losses. “Even though penalties for tapping into your retirement accounts early have been eliminated for 2020, try to avoid taking money from your retirement accounts,” Keckler says. “An early withdrawal reduces the size of your retirement nest egg, and the funds you withdraw will no longer grow tax-deferred.”
Should I Buy Back Into an Investment That’s Rebounded?
Watching an investment you sold at a loss rebound can be the most painful part of investing mistakes – so painful that many investors fall into the trap of panic selling every dip and buying back in on every upswing. As a result, they end up losing money on every cycle of trades.
If you’re going to get back into the same investment, do so because you think it’s a strong long-term investment at its current valuation, not because of recent price movements.
Reinvesting should be a “purely independent decision” from your previous experience, Stammers says. Does it make sense to buy at its current price?
Review analyst reports, Securities and Exchange Commission filings and the CEO’s letter to shareholders to gain a better understanding of the company’s prospects and business model. “The best way to recoup from a loss position or bad investment is to be disciplined on the front end,” Stammers says.
People often buy an investment without understanding what drives its returns, Phillips says. Then when it goes down, they have no basis for determining if that negative movement is just normal market activity or a signal something is fundamentally wrong with the company.
How to Know When to Sell an Investment at a Loss
“Any reduced account values aren’t permanent unless you sell your investment,” Keckler says. “When you see your portfolio drop, try to stay invested. You still own the same number of shares of each investment when the market declines; if and when those shares move higher, you’ll be able to participate in the recovery.”
Unless your falling investment is a legitimately bad apple. In this case, it may be best to throw it out before it sours the whole bushel.
“Generally, there’s no reason to sell unless it’s no longer serving the role you intended for it in your portfolio,” Stammers says.
If that happens or if there’s been a fundamental change with the company that will impact long-term performance, don’t wait: Sell, sell, sell.
Too often in their determination not to lose money in the stock market, investors end up being worse off over time, Phillips says. As long as your money is tied up in a sinking ship, you’re losing the opportunity to make money elsewhere.
“It’s that opportunity cost and the missed compounding over time that ends up being a bigger loss than the original investment,” he says. If there’s a better investment available, take the loss and move on.
Where to Invest After Stock Market Losses
Recovering from a stock market loss requires patience. Ameriprise’s research found that financial comebacks often take years. Most of the 3,000 respondents didn’t recover from their setback until three to five years later.
“This isn’t surprising given that on average, based on 90 years of history, it takes up to 70 weeks for markets to regain their lost ground,” Keckler says. So be patient when trying to recover money lost in the stock market.
One of the biggest mistakes investors make is trying to get all of their money back at once. They’ll buy into an investment they think will regain everything they lost in the next six months. As a result, they often invest in something excessively risky, and instead of making back their 20%, they lose another 20%.
If you have a long-term goal, you don’t need to recover your stock market losses right away. Even if you’re nearing retirement, you won’t need to use all of your money at once. You can structure your portfolio to get the return you need over time without taking unnecessary risk.
Success is not about the highest return, Phillips says. It’s about finding the investments you can stick with that are the most likely to provide the return you need to achieve your goals.
When faced with uncertainty, don’t let paralysis or emotions drive your actions. There is a third way investors can respond to stock market volatility, Keckler says, and that is by staying invested in accordance with their overall investment strategy. “We’ve been through turbulent times in the markets before, and historically the market has recovered,” she says.
There’s no reason to think it won’t do so again, and when it does, you’ll want to be invested to reap the rewards.
