The investment seemed like a good idea. For a while, its value increased. Then, without warning, it began to plummet. Suddenly you’re faced with a decision you’d never hoped to make. Are you fishing or are you cutting bait? In other words, what do you do when an investment goes bad?
When an investment sours, remember what drew you to it in the first place. Your relationship with a stock is like any relationship. It could have been love at first sight, a case of heart over head. It could have brought balance to your portfolio, a case of opposites attracting better returns. Just as it can help revisiting romance when a marriage gets rocky, returning to your early research can help. If the fundamentals remain sound, then holding on to the investment could be a smart choice. After all, circumstances beyond our control can affect investments. Think of how often people sell when the market drops. Those sellers locked in their losses. Calmer heads discovered new growth days or weeks later, watching as their investment did more than return to its glory days –– it exceeded them.
Of course, that’s not always the case. Sometimes you were talked into an investment you didn’t understand. Let that be a lesson. The next time you’re confused, ask questions. If you still don’t understand the investment, walk away. Sometimes confusing investments are actually fraudulent, like the bad investments in GPB Capital Holdings. In 2019, its offices were raised by the FBI while its former chief compliance officer was indicted. In cases like this, the only way you’ll have a decent chance at getting your money back is by hiring a competent attorney.
Have a “Sell” Number
Emotion is a poor navigator when you’re sailing the unruly seas of the stock and real estate markets. When you make an investment, recognize that it might decline in value. Have a number in mind. If it falls below that value, it may be time to sell. If you have new information, then of course you should apply that knowledge. Just holding on to a declining investment because you don’t want to lose money on it is foolish. If it continues to drop, then you might lose everything.
Rejigger Your Portfolio
Besides focusing on an underperforming investment, use the occasion to examine your overall portfolio. High-risk, high-growth investments may have made sense when you were in your 20s. Decades later as you consider retirement, you may want to discard some of those instruments for ones that offer more stable returns. Plus, there may be tax advantages to selling a losing investment that will cushion the blow.
Finally, use the bad investment as a learning experience. Remember, even so-called pros make bad investments. Even worse, they often get so nervous afterward that they continue making bad decisions. After Fannie Mae and Freddie Mac were placed into conservatorship back in the late 2000s, banks that had substantial amounts invested in those government-sponsored enterprises didn’t just lose money on their investment. Afterward, their loan growth was two percent lower than at other banks.
If you made the investment because someone convinced you it was a sure thing, vow to do more research in the future. If underperforming stocks are costing you sleep, consider turning to an exchange traded fund (ETF), or another instrument that copies the asset allocation of the Dow Jones Industrial Average or the S&P 500. The funds usually charge very low fees. If your investments grow because one bad choice forced you to step back and reexamine your strategy, then that one loss was well worth it.