The efficient-market hypothesis, a common and well-held principle in famulus, assumes that asset prices reflect all available information, meaning that price drops in concert with a fall in value. In Town’s experience, this is not to be believed. In his words, the value of a stock is not equal to its dollar value.
SUFFERING AN investment loss happens to most investors at least once, and a major loss can result in trauma that can be hard to overcome if not managed properly. The key, experts say, is turning from the loss toward a plan of action and recovery rather than fear and inaction.
With clients who are dealing with a major investing loss, Heaton starts them thinking about how they got to the place of despair and then examining the “complex behavioral dynamics related to wealth while creating strategies for future resiliency.”
Of course, this is easier said than done. To keep your spirits up after a loss and keep you invested for the long term, take the following steps:
- Move on.
The worst thing an investor can do after taking an investment loss is to act rashly. “The first step is to not make any major decisions in the immediate aftermath of a major loss,” says Forrest Talley, a psychologist with Invictus Psychological Services in Folsom, California. “During this period of time, your thinking is clouded by the emotional gut-punch you just received.”
Consulting with competent and trusted legal and financial advisors about how to get back on track can help an investor avoid an over-correction.
When you invest money in anything, you have an expectation for how things will go. You should also have an idea of what circumstances would cause you to exit that investment and move on,” Matthew S. Miller, principal and wealth advisor at Upleft in Port Angeles, Washington, says.
“When you need to let an investment go, there is one simple question to ask yourself,” he says. “Forgive yourself for any prior decisions, forget about the past and ask yourself this one question: ‘If I woke up today with no investments, would I invest my money the same way it is today?’ If the answer is ‘no,’ then you owe it to yourself to make a change.”
“You once believed that your investment was a good fit for you. This is why it can be so difficult to move on in a more positive direction,” Miller says. “Acknowledging that you should make a change, means acknowledging that you could have made a better choice in the past. Rest assured that you are not alone in this. Everyone has made at least one bad investment, and many have paid a very steep price. Eventually, they move on and almost all wish they had done so sooner.”