Stock market losses? Keep on investing!

Once bitten, twice shy — that’s how some investors feel about some stocks, or even about the stock market as a whole. Sometimes it happens that the losses are just too big to bear, causing these investors to feel like bailing out. But should you? Should you just recognise an exercise in futility for what it is and abandon ship, or should you “keep calm and carry on”?

To help you become a better-informed investor, Spiking offers insights into 10 exchanges in eight countries across the region. We also have some insights for you into whether, and why you should shy away from stocks after sustaining heavy losses. So before you swear off the stock market for good, take a moment to chow down on some food for thought.

Quitting is NOT the Answer

A 2011 Prudential Financial survey published on CNN, which covered over a thousand investors between 35 and 70 years old, says 58% of them lost faith in the stock market. Almost half of them, 44%, said they planned to never, ever, invest in the stock market again.

It’s natural for us to want to steer clear of things that have done us harm. But Ramit Sethi, of I Will Teach You to Be Rich, points out that the decision made by that 44% was not one made after careful evaluation. It was, rather, a decision made out of fear and ignorance. He goes on to say that withdrawing from the stock market entirely would probably be the worst financial move anyone could make.

Other financial experts tend to agree. A featured Expert on the Wall Street Journal, Greg McBride, recognises that all investments, in the stock market or otherwise, comes with volatility or with risk (which Spiking has discussed in a previous post: https://spiking.com/blog/investment-risk-taker/).

Instead of giving up on stocks altogether, Mr. McBride suggests rebalancing your portfolio, and practising dollar-cost averaging. The former ensures you buy low and sell high, while the latter ensures you buy more when prices are low, and less when prices are high. These practices can help you resist the urge to do what Mr. Bride also calls “the worst thing”, which is to definitively ditch the stock market.

How Much Time Do You Have?

A resounding “No” is also what Jeremy Vohwinkle said on Generation X Finance, in reply to the question of whether an investor should take his money out of the market completely. Mr. Vohwinkle says investors should understand their “true time horizon”, or how much time they actually possess in which to grow their investments.

He notes investors in their 30s still have about 30 more years before they will need to use their money for retirement. Pointing out that any number of things (i.e. technological or even political advancements) could happen in that time, Mr. Vohwinkle asks investors to ask themselves how soon they intend to use their funds. If their invested funds are meant for their retirement, would it be a smart thing to do to pull out of the stock market after just a few years of losses?

Mr. Sethi likewise acknowledges how investors in their 20s and 30s will be able to withstand temporary losses and still come out winners by the time they retire. He adds that those who want to pull out of the market because they don’t want to lose their money, actually are losing money by the simple act of not investing. Such a loss may not be obvious now, but it will definitely come back to haunt them in a few decades.

Some advice for investors who don’t have as much time on their side comes from Suze Orman. Writing for Oprah.com, she says that focusing on short-term performance is never a smart thing to do. An investor of this age group who has lost heavily at the stock market would be making a mistake if he pulled all of his investment capital out of it. Selling would mean locking in all his losses, and missing out on all the gains that will come when the market rises again.

Miss Orman suggests this rule of thumb for investors who are over 40 years old and want to tread more cautiously going forward: If you are 40, keep 40% of your investment in bonds, and 60% in stocks; if you are 50, invest 50% in bonds and the other half in stocks; if you are 60, put 60% in bonds, and so on. That way, your portfolio will combine growth and safety in relation to your age. Discover great stocks to add to your portfolio with the Spiking app today.

When It’s Okay to Let Go

While we’ve established that quitting the stock market cold turkey is not the solution, dropping individual stocks might not only be advantageous, but actually necessary. Writing for the Inquirer.net, Henry Ong says there are certain stocks that never recover from a market beating. Blue chip stocks tend to recover from setbacks because institutional investors tend to repurchase them when things get back on the up and up.

But not all stocks are as lucky as these blue chips, and holding on to them in the hopes of them hitting the highs they once had, might be a bad idea — particularly if your losses pile up, and the share prices keep going down. Mr. Ong suggests checking out those stocks’ fundamentals, and if the numbers aren’t solid or there’s just no real reason to hold on to them, it might be better to sell them as soon as possible.

Mr. Ong also advises investors who have gotten burnt at the stock market, to let go of negative emotions as well. Disappointment, or even despair often accompanies financial loss, and in the case of many investors, these feelings can cause them to pull out of the market permanently. It would be far better for you to learn from your losses, and adjust your investment strategy accordingly.

Invest Smartly with Spiking

Spiking helps you make smart investment decisions by giving you real-time updates and insights into not just the Singapore Exchange, but nine other exchanges in Australia, Hong Kong, India, the Philippines, Thailand and Vietnam. You can track the performance of every stock spiking, as well as the buying and selling activities of blue whale investors. You can even reach out to your fellow investors and talk about the latest goings-on on the trading floor using the Spiking app’s chat function.

Download the Spiking app from iTunes and Google Play today, and don’t miss out on your chance to earn your Pioneer Member badge, which is available for a limited time only. Visit the Spiking app homepage now.

Sources:

 http://www.wsj.com/articles/SB10001424127887323623304579057514014645786

 http://genxfinance.com/question-should-i-get-out-of-the-stock-market/

 http://www.iwillteachyoutoberich.com/blog/44-of-people-plan-to-never-invest-again/

 http://business.inquirer.net/205459/how-to-deal-with-losses-in-the-stock-market

 http://www.oprah.com/money/How-to-Invest-After-Losing-Big-in-the-Stock-Market

 http://money.cnn.com/2011/06/01/markets/thebuzz/index.htm?iid=HP_River