How to recover after an investment loss

Published on 25th May, 2023 at 02:45 pm

While investing the right way is a smart move for building future wealth and reaching goals, it involves varying degrees of risk depending on your risk appetite and the asset class you choose when investing. As an investor, you naturally want to see healthy returns on your investments, but what happens when, instead, you suffer an investment loss? How can you come back from this and prepare yourself to take the risk of investing again?

Reading time: 3 minutes

In this article you’ll learn:

• The importance of an investment strategy, and the value of sticking to it.
• Why investing can be a risky business, but why it’s worth it in the long run.
• How to recover from an investment loss, and why partnering with a financial planner can help you.

Why risk and growth go hand in hand

“Inflation remains one of the most important risks to building and maintaining wealth. It doesn’t stop posing a challenge at the end of your working years, but is also a challenge during retirement. Ensuring that your retirement income can maintain its purchasing power is vital,” says Certified Financial Planner^® Jaco van Schalkwyk of Plan-B Bluestar, authorised by Sanlam.

The best way an investor can overcome inflation is by exposing investments to enough growth assets. “Growth assets include SA Equity (shares in listed companies), Global Equity and Listed Property (real estate). These asset classes can have a wide possibility of returns in the short term, but in the longer term, the uncertainty diminishes, and returns become far more predictable,” he says.

Learn more about inflation-beating investments here.

Meet your partner in investing success

A common mistake that investors make is not having a plan and selecting an investment based on what they believe will make them the biggest return in the shortest time. “Rather partner with a trusted financial planner who can assist you in avoiding such disasters in the making,” suggests van Schalkwyk.

When you book a meeting with a financial planner through Sanlam Reality, you earn 8 000 tier points! Book now.

How to recover from an investment loss

Don’t panic

Avoid reacting to falling prices by jumping out of the market. In fact, being out of the stock market can prevent you from earning higher returns, when markets do recover.

Prepare for the guaranteed reality of a loss occurring

Markets move through cycles, and sentiment, emotion, optimism and pessimism have a significant influence on markets. Being an investor means being exposed to markets that are guaranteed to provide several periods in a generation that will seem very uncomfortable, uncertain, and will make you consider exiting the markets for the perceived safety of cash. Think 1998, 2001, 2008 and 2020.

Cryptocurrency is a volatile option for investing. It’s regulated in South Africa now, but does that mean you should include it in your portfolio? We asked an expert here.

Come to terms with your own investor behaviour

Loss aversion is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. Loss aversion can prevent people from making the best decisions for themselves to avoid failure or risk. Though being risk-averse is useful in many situations, it can prevent many people from making logical choices, as the fear of loss is too intense.

Stay invested

If you experience a loss, consider adding lump sums or monthly contributions to the investment from cash reserves or monthly income to benefit from Rand cost averaging, with the knowledge that the markets will recover as they have before. Avoid allowing loss aversion to prevent you from making good, logical investment decisions by re-framing the question of loss when making decisions, identifying worst-case scenarios, and rationalising those decisions.

A qualified financial planner is the ideal expert to partner with, whether you’re starting your investing journey, or recovering from an investment loss. Meet with one today.