Losing money in stocks. Losing money in investments. I believe everyone who has invested before has lost money and it is a painful experience. Nobody wants to lose money as losing money makes you feel like you’ve made a mistake.
I’ve lost money in my past investments. After feeling upset and angry that I lost so much money, I went to read up and research on what can be done to avoid losses. During my research I found out that it is impossible to completely avoid losing money but you should instead learn methods to embrace losing money in stocks!
I will share 3 methods with you and explain how you can adopt a different mindset to get more comfortable with the idea of losing money. Eventually if you follow these 3 methods, you will feel neutral towards losing money and get less upset over it.
1. It Is A Learning Process
When you have just learned a new skill and you first begin using it, what do you think the odds are of you making a mistake? It is probably extremely high!
Think about the time when you first started to ride on a bicycle. Do you remember yourself falling over? I remember falling over numerous times and scrapping my knee in the process. But this happens whenever you start learning a new skill. You will fall and you will make mistakes.
Nobody ever picked up a bicycle and cycled instantly without falling down. (At least no one that I know of)
When you are learning a skill as complicated as investing in the stock market, you will definitely lose money. Even experienced investors who have been investing for years still lose money when they invest.
They don’t have a 100% success rate. But they understand that losing money is part of the learning process, so they don’t feel upset when it happens.
The first method to get comfortable with losing is to develop a mentality where you accept that losing money is part of the learning process. It is bound to happen so don’t get upset over it. Eventually as you get better, you should have fewer losses.
However if even experienced investors lose money when they invest in the stock market, how does anyone make money in stocks?
To understand this, let’s look at a scenario.
Storage Tank And Bucket Size
You have a storage tank full of water and your job is to make sure the tank is never empty. Whenever you need to draw water from the tank, you have to use the blue bucket to remove water. If you are pouring water back into the tank, you have to use the yellow bucket to do so. Notice the blue and yellow bucket.
Each day you have activities that use water but the amount of water used is not fixed. The usage can range from 4 to 10 blue buckets of water a day.
However you also have a daily delivery service that provides you with 2 yellow buckets of water each day. In this case, do you think the storage tank will ever run out of water?
The answer is no, the tank won’t run out of water as the daily supply of water is more than the daily usage. (2 yellow buckets provide more water than 10 blue buckets!) And this is how investors make money!
The blue buckets represent the money lost on each investment and the yellow bucket represents the profits from each investment. The profits from a winning investment is far larger than the losses from a losing investment. This is why investors feel comfortable and not worried when they lose money as their profit is a lot larger compared to their losses.
They can make a few losing investments and not feel upset over it because one successful investment will easily cover most of their losses.
2. Look For Worthwhile Investments
Thus 2nd key to embracing losses is to only invest in worthwhile opportunities. When you buy a stock, it must have the potential to give you high returns and low losses. You should try to follow a payoff ratio when you invest. An example of such a ratio is 3:1, where the maximum profit you get is $30 and the maximum amount you lose is $10. These are the kind of opportunities you want to be investing in.
This is what I keep in mind when I am looking for opportunities. In the above scenario, I am not afraid to lose money because I know my overall strategy is profitable.
But how do you control the maximum amount of money you lose each time?
3. Using Stop Orders
When you invest $100, it is very unlikely you will lose the entire $100. It is very unlikely to even lose $50 as you can control the price you sell at. Investing is not the same as gambling. You control when you enter and exit. You can look at this video to view the main differences.
In most cases, you would employ something called a “stop loss” or “stop order”. A stop order is a type of order you put into the stock market that automatically sells your position the moment it hits a certain price.
Here is how it work. You bought a stock at $100 and you decide to put a stop loss at $90. In the event the stock price drops to $90 or lower, your stock will be sold immediately. The stop order does not executed if the price never drops to $90. So you have control over the maximum amount you can lose and in this case it is $10.
Unless you choose to invest in some extremely risky investment, if not the chances of you losing 50% of your capital in a single investment is pretty small.
Change Your Perspective
To be comfortable with losing money when you invest, learn to change your mentality and perspective of how you approach investing.
Once you accept that losing money in stocks is part of the learning process and you learn to minimize your losses by looking for worthwhile investments or using stop orders, you will get less upset over losing money. You will learn to take losses in stride and move forward onto the next available investment.
If you are interested to find out what is the best way to approach investing and learn more methods to handle the emotions that arise from investing, you can click here to take a look at my course. I discuss more about the necessary but commonly overlooked aspects of a profitable strategy.