“Coulda, woulda, shoulda” (or some variation of those words) is something my father likes to say to me when I recount a loss or missed opportunity. The semi-sarcastic reply with a kind sincerity always results in a wry smile. That’s because there’s something healing about the saying.
We’ve all felt that sting of a financial loss. But when it turns into a persistent pain, you’ve got to do something about it – because then, you’ll both feel much better. You and your bank account.
My father’s subtle wisdom around retrospection applies to investors as well. It implies moving on with the right perspective. “Remember that the ‘value’ of your portfolio is always hypothetical until you actually sell,” says Morningstar’s behavioural economist, Sarah Newcomb. You own securities that could fetch a certain amount if sold. “But, were you planning to sell them all today?” asks Newcomb.
And why didn’t you sell them earlier?
Mistakes We Make When Letting Go of Money
What led you to sell, not sell, buy or not buy is often frustrating, stressful and even fear-inducing to try to figure out. These emotions can be an issue.
“The problem is that if we go seeking more information when we feel afraid, we might easily get more worked up because our perceptions of risk can be affected by aspects of risk information itself, and by contextual clues such as colour, graphics, and sound effects,” says Newcomb. “Multiple studies have shown that fear itself can make negative outcomes seem more likely, so doing an information search when you are already afraid can magnify – rather than reduce – fear and anxiety.”
- Mistake 1: Making Decisions Under the Influence of Fear.
“Losses weigh heavily on our minds, even more so than gains,” notes Morningstar Behavioural Researcher, Samantha Lamas, “Experiencing a loss generally feels twice as bad as gaining the same amount.” Combine that with the internet, and it’s easy to fall into a vicious cycle of fear, fear-of-missing-out and bad trades, especially in the online age.
Sentiment from the wrong source at the wrong time can easily lead to repeat appearances on the wrong side of the trade. “Information is valuable, and we must do our due diligence as investors and research the products and services we buy before we buy them,” explains Newcomb, “However, we also need to be wary of how the presentation of investment information makes us feel and avoid doomscrolling and sensationalism when we are emotionally vulnerable.” - Mistake 2: Doubting the Original Plan. Feelings of loss can have you doubting a well-vetted strategy, and can lead to the rushed offloading of risky assets. This is known as loss aversion, says Lamas: “This powerful bias can lead to a string of financial mistakes, such as overreacting when experiencing a loss, prompting you to be overly cautious the next time around or try to take on added risk to make up for bad performance.”
Moving money out of risky investments to cut our losses might make us feel safer and calmer in the short run notes Newcomb, “But it may very well be long-term financial self-sabotage,” she says, “Repeated studies show that people who move their money more frequently consistently underperform both the market and their more composed peers.”
How to Move on From Financial Loss
If looking at a balance in the red has you feeling stressed or scared, silence the pundits and doomsayers, says Newcomb. “They most certainly will not help put you in the right frame of mind to do your best reasoning.”
One way to get in the right frame of mind is by changing the narrative. “When there’s market volatility and my portfolio takes a hit, I try to reframe the situation,” says Lamas, “Market volatility can be treacherous, but it can also be an opportunity to buy some quality investments for low prices.”
- Reframe the Situation
While taking a new perspective on your loss, you’re still allowed to look back. But be fair to yourself. “Try not to anchor on the highest-ever estimated value,” says Newcomb, “To mentally attach yourself to the highest hypothetical value those collective assets might ever have produced for you if you sold them all at one go is basically setting yourself up for pain.” That highest-ever value is an estimate, not a reality, she adds, “and I think we give it too much power over our well-being.”
If you find your financial troubles are weighing on you, getting out can make a world of difference. “Another thing I try to do is get out of my own head,” says Lamas, “For example, by taking a walk, volunteering within my community, or just helping out a friend. Helping others can help put things in perspective. With a refreshed and balanced state of mind, even a financial loss can seem less daunting.”
- Go Ahead and Grieve
Part of taking back control of our emotional health also involves letting go. “Go ahead and grieve,” says Newcomb, “If you can’t reframe it, you might have to let yourself feel it. If you must sell or forfeit assets for less than you paid for them, there will be pain. In that case, feeling and processing the loss is actually important so that unresolved fear or resentment doesn’t negatively affect future investment decisions.” “Losses are really just part of the playing the game,” adds Lamas, “and finance may be no different. Even a well-constructed portfolio that has substantial equity exposure will lose value about one-third of the months in its lifetime.”
- Set Boundaries
We should also set up boundaries between the investment world and ours for our sanity’s sake. Lamas likes to use a check-in schedule after a loss: “Say I lost some amount in my portfolio, instead of constantly checking it, I restrict myself to only checking it once a day or less. Constantly checking in on your portfolio after you experienced a loss will only lead to further stress and, maybe down the line, behavioural mistakes.”
- Don’t Mistake Bad Outcomes for Bad Decisions.
Mental boundaries are also important to establish in investing, so try not to take outcomes too personally – especially when you’re up against the laws of probability. Annie Duke talks about this in her book Thinking in Bets, says Newcomb: “Any decision we make as investors has a probability of good outcomes and a probability of bad outcomes. That’s risk. If you make an excellent decision, there is still some probability that it will turn out badly. Just as bad decisions can sometimes turn out well. A bad outcome doesn’t mean you made the wrong choice. If I bet you $1M that aliens will land on Earth tomorrow, taking that bet would probably be a good decision,” says Newcomb, “If by some fluke of cosmic history we are visited by aliens tomorrow, it doesn’t make your decision to take the bet a bad one. It simply means that the outcome fell into the 0.00000000000001% category of outcomes.”
