We have faced a few almost-unexpected downturns recently,
- The collapse of Lehman Brothers.
- Slumps in oil prices in 2016.
If you are invested in the market, these downturns would have pinched you or caused you to change your lifestyle entirely.
All these are almost-unexpected, so how should we brace ourselves if we encounter times like these?
How does the Stock Market Work?
3 groups of people involved:
- A man – businessman
- The villagers
- An assistant – the businessman’s assistant
This an analogy of the stock market with the buying and selling of monkeys.
A man appeared to the villagers and told them that he would buy monkeys for $10 each
- The villagers went to catch the monkeys and sold to the man for $10
- The villagers stopped catching monkeys as the supply went down
The man said he would now buy monkeys for $20 each
- The villagers went back to catching monkeys to sell them to the man for $20
- Until the monkey-supply got even lesser and the villagers stopped
The man then said again he would now buy the monkeys for $25 each
- This continued till the monkey-supply got way too little to catch or even spot one!
The man announced that he will buy the monkeys for $50 each
- The man left for the city
- Says his assistant will now buy on his behalf
The assistant then said, he would sell them all the monkeys the man was holding for $25 each and they could all sell it back to the man at $50 when he gets back
- The villagers get all the money they could and bought all the monkeys
But they never saw the man or the assistant ever again!
That is us if we bought into the company or market with high hopes of getting more than your money’s worth but ended up facing uncertainty or even losses.
When faced with such situations, what should you do?
Our Seedly Community had gathered and shared what they had done and their advice on how we should cope with our investment losses.
1. Limit Your Investment Losses
- It is a good practice to set a risk threshold for yourself, setting the maximum amount you are willing to lose.
- Setting a stop-loss order with your broker to ensure your position is automatically sold when it drops to your threshold to prevent from losing more than you can afford to lose.
Lee Jia Hui – Cut loss and never repeat the same mistakes. Some people never touch stocks again because they feel that they earn enough and don’t think they need to take the risk. For me, I feel I don’t earn as much and that was the motivation to strive to master the art of stock selection.
Nur Hazwan Bin Amin – Rule #1: Cut your losses fast and small. Rule #2: Repeat Rule #1
2. Don’t Borrow Money or Over-leverage for Your Investment
I think this speaks for itself, the last thing you want to have to add on to your losses is the compounding interests from taking up additional loans. If you are leveraging your investment, do not over-leverage.
It is a good practice to ensure that you have at least 6-month salary as emergency funds before embarking on your investment journey.
Lee Jiahui – Burnt during the Lehman Brother crisis, suck thumb. Just make sure never ever borrow money, don’t high stakes, and it can’t be that bad. The money you lost can always earn back.
Ronald Wong – Don’t over-leverage. Most accounts are blown because of excessive leverage. If you are trading small capital, use smaller account sizes (e.g. for FX, go micro or nano if your account capital is 1k or lower). We typically trade with 5x or lower leverage while brokers outside offer up to 100x to 400x which is just crazy.
3. Study and Learn More About Investment
Your learning never stops when you make your first investment. In fact, that’s where the real learning starts. Real learning starts when you make your first capital gain/loss, you get to learn from your own investment journey.
Continuous learning on the company/market that you are invested in will help you keep up to date with valuing your own investment. You may attend courses to guide you on your investment journey such as attending investment talks or taking up online courses, there are many that are available online for you, some of them are free!
If you have been making losses on your investment, maybe you should stop and take a breather. Try again but on paper this time, using trial platforms that provide paper money for you to practice!
Soon XiaoHui – If you keep losing money, just take a break. Then look at it again, but this time, use paper trades first. Build back your confidence first before re-entering the market. always remember some strategy only works in certain months or conditions. avoid being greedy.
4. Never FOMO
Fear of missing out. When it comes to investment, never invest because you fear that you would miss out.
Jay Tee – Most important rule: NEVER FOMO and buy into a rally! There will always be good trade setups/opportunities in future ?
5. Learn From your Investment Mistakes
This is very important and also very humbling. Don’t go chasing back the losses that you have made by partaking in risky trades with hopes of earning a quick return.
Choon Yuan Chan – After being burnt, your mind will be blank for a few days. My advice is to regroup and soldier on but do not think of chasing back your losses by engaging in large penny purchase or extreme leverage
However, there is a silver lining, during recessions some blue-chip stocks would have also suffered a downfall in their prices, that is when they are selling cheaper than they usually are. Why not take this time to study them and judge if they are worth investing.
Read more: 10 Stocks To Buy In The Next Market Crash
All in all, the best investment you can make is your body. Eating healthily and having regular exercise to ensure that you are healthy is the true investment.
Finding time to exercise in the midst of our busy schedule can be quite a challenge but it will be worth it in the long run.
With that, I’ll leave you with something one of our community members have shared with us.
Kenichi Xi – The word INVESTMENT is used so loosely that it does not have a purpose anymore, other than making BIG money. The true purpose of an INVESTMENT should be WEALTH PRESERVING while you are CONSISTENTLY making the INCOME that builds your POT OF GOLD (savings) which allows you to enjoy your life with a PURPOSE and a NICE BODY.
If you have more questions, we have an open community for you to get your questions answered and to hear from different perspectives as well. Check out our blog for more unbiased opinions on your personal finance journey.
I’ll see you in the next one, and until then, may the Personal Finance force be with you!