People who are “excellent with money” are frequently praised for their ability to prevent financial loss. However, losing money in the stock market happens to everyone, and claiming otherwise, or worse, bouncing from one to investment to try to reduce losses, can put you in a mess.
It’s a part of conducting business in the stock market, and learning to accept downturns is an important aspect of becoming a financially mature investor. When making financial decisions, we must consider both loss and risk, and learn to utilize them as tools to help us plan for the future, rather than as subjects to be avoided out of fear or shame.
Listen to this week’s RICH & REGULAR episode about the fear of losing money, and then read on to learn how to assess risk in your life in order to avoid financial loss.
Understand the Distinction Between Risk and Loss.
Humans are hard-wired to avoid a loss to the greatest extent feasible. This makes evolutionary sense because loss usually indicated something life-threatening, such as a lack of food or fleeing predators. Unfortunately, even when (or perhaps especially when) we’re staring at our bank accounts or investment portfolios, our brains continue to send us these warning signals.
Loss aversion is a branch of behavioral economics that is defined as “the fact that human beings experience losses asymmetrically more acutely than similar gains,” according to Investopedia. This overpowering fear of loss can lead to illogical behavior and poor decisions, such as holding onto a stock for too long or too short a time.”
Humans have a tendency to place a higher value on our fear of future loss than on any potential advantages. We can utilize loss aversion to our advantage while prepared to take a risk instead of reacting emotionally if we take a deep breath and look at a loss from an academic position.
To Avoid a Loss, Assess the Risk.
How can risk management be used to help us avoid future losses? Make preparations ahead of time. It’s really personal how you approach risk and loss. Knowing how we are likely to react when faced with the prospect of loss helps us to leverage this information and take measured risks.
Consider the Future.
Consider moments when you were confronted with unanticipated challenges. What was your reaction? Did you attempt a modern-day circling of the metaphorical wagons to safeguard what was yours? Did you take a deep breath and lean into the discomfort, or did you take a deep breath and lean into the uncomfortable?
According to statistics, the majority of us panic and scramble to protect what we have, often at the expense of prospective profits. Still, we can teach ourselves to assess risk in a more rational, less emotional way. Begin with these suggestions.
Know Who you’ll be Collaborating With.
Buyer beware stories abound in investment forums and brokerage offices of people who didn’t do their homework and trusted the incorrect person. Before you hand over money or sign anything, do your homework on every opportunity that comes your way.
Also, think about who is requesting you to invest, whether it is an individual or a group. What is their track record in the past? Do they have a reputation for being cool and collected, or do they react emotionally and panic when issues arise? It’s just as vital to know who you’re doing business with as it is to evaluate the prospect.
Prepare for Anticipated Problems by Visualizing Them Ahead of Time.
Professionals, like everyone else, make mistakes. Reduce the potential consequences by brainstorming as many potential problems as you can, from catastrophic to moderately bothersome, and then ask yourself, “How awful would this be?”
If your response entails being financially wrecked or otherwise losing more than you’re comfortable with, speak with your brokerage advisor and make changes to your strategy.
Create Checkpoints to Aid in Your Evaluation.
When contemplating the possible risk of an investment, keep in mind that the payback could be years or even decades away. Creating a list of criteria or milestones to meet and cross off along the way might help you track the development of your investments over time and see trends.
Having this information allows you to analyze the performance of your investments throughout market cycles and make more informed decisions when things get tough.
Create a Group of Specialists.
It’s difficult to know who to trust. There are a lot of people on the internet who claim to know how to get the most of your money, and it can be difficult to separate the truth from the noise. Use the Broker Check on the Financial Industry Regulatory Authority’s (FINRA) website to authenticate your broker’s accreditation and any previous disciplinary action taken or documented difficulties with brokerage companies or brokers you’re considering dealing with.
It’s also crucial to verify sure your broker’s ideas are compatible with your own. Before you register an account with them, look into not only their costs and returns, but also their customer service ratings, their website’s about page, and what other investors have to say about them.
Trust Your Gut Feelings.
To assist us to evaluate investment options, we must first understand ourselves and our risk tolerance. Sometimes our instincts about something being harmful are spot on, and you should avoid it at all costs.
Other times, our fear of prospective loss prevents us from taking a risk that could pay off handsomely. To guarantee that your investments are as successful as possible, you must mix listening to your instincts with the objective examination.