Market losses refer to any kind of decreases in your investment portfolio.
It’s important as an investor to know how to deal with losses when they occur. Panicking and shedding your portfolio during a massive market crash can actually mean you lose more money in the long run, rather than if you’d held on for a few months while everyone else traded themselves silly.
However, you also have to know when to back out.
To better understand what you should do, you first need to know what kind of losses it is that you’re facing. Here are a few of the most common types of losses.
Capital loss - Capital losses are the kind we all think of when we talk about taking a hit in our portfolio. These losses are relatively simple compared to some of the others. Simply put, if you buy a stock, the price goes down, and you sell at a loss, you have made a capital loss (as opposed to a capital gain).
Opportunity loss - Opportunity losses can be more frustrating mentally, in part because you may not see them coming (as you sometimes will with a capital loss). The financial damage from these losses isn’t always clear, either—you may just be aware that you’ve missed an opportunity, rather than how much you’ve missed out on.
Paper loss - Paper losses occur when an investor doesn’t sell a losing position in the market because “it’s only a loss on paper.” The thinking often goes that if you don’t sell a falling stock, you haven’t lost any money yet, because you haven’t cashed in your shares. In reality, if you’ve made a loss on paper, you’ve made a loss in your pocket, at least theoretically.
Suffering any kind of loss in the market can be panic-inducing, but the most important thing is to not lose your head. While many investors believe that the best thing to do is cut your losses and find the next best thing, that’s not always the most fiscally responsible move.
In fact, a wealth of research shows that, in the long run, value (buy and hold) investing strategies lead to the largest returns over a period of 20 years or more. While things may seem bad right now, keeping your mind on the long game can help shape a more positive perspective on your losses.
While we can’t tell you whether buying or selling a certain stock is always the right decision for you, we can provide you with a few tips to help deal with your losses and make these decisions on your own.
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