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Why You Should Not Panic When You Lose Money In The Stock Market

Here is what you need to know about the stock market to avoid panicking when the market isn’t performing well

 

One of the greatest fears that people frequently cite when they share their reluctance to start their investing journey is the fear of losing money. This is understandable, as most people would prefer assurance of their cold hard cash to the uncertainty of an investment that may earn or lose money. Like it or not, investing in the stock market does entail an element of uncertainty.

The fear of failing is very real for most retail investors. Most of us are not trained to be mentally prepared for the ups and downs of the market. The thought of investing, and then subsequently losing, is not something that we would like to be experiencing. The anxiety, fear and dejection that follow a losing investment inhibits us from making the correct decisions and may even bring us to discontinue the investing journey, even if our strategy was sound to begin with.

Taking Baby Steps To Start

Remember the first time you learnt how to swim? Most people would learn how to swim shallow waters, rather than jump in at the deep end. This is because you instinctively know that jumping into the deep end of the pool before you learn how to swim is a bad idea on the best of days.

Similarly, investing doesn’t require you to jump into the deep end of the pool, what we mean is that you don’t have to immediately plough $10,000 during your try.

It is more logical to start with a small investment first. This lets you gain confidence and knowledge about what you’re doing and how you should be doing it. For a start, you can try investing via a monthly investment plan that charges a low commission. For example, Maybank Kim Eng has a Monthly Investment Plan that allows you to invest as little as $100 a month into the stock market.

The best part about these monthly investment plans are that unlike other instruments such as Investment Linked (Insurance) Policies, you are not saddled with the burden to contribute any amount each month. You invest each month if you choose to.  Ideally, we advocate having a disciplined attitude in making regular monthly investments. But still, the option to pause or change your investment strategy (for whatever reasons) remains in your hands.

Choose Something That You Understand 

When you first start investing, invest into something that you understand well. All too often, we see people who have limited knowledge about the stock market deciding to pick and choose stocks they don’t understand simply because their friends are doing so.  If that’s your plan, you are better off using a mutual fund or even just keeping your money in cash holdings.

Invest in products or asset classes that you are familiar with. One good way to start will be to invest in the STI ETF, which we would encourage new investors to consider exploring. When you invest in the STI ETF, you are investing in the belief that the Singapore economy would, in general, continue to grow and that the largest listed companies in the country would continue to perform well. The STI comprises the 30 biggest companies listed in Singapore, and we are sure even laypeople would be familiar with companies such as SingTel, DBS, SPH and Comfort Delgro. Reasonable companies that we dare say are worth owning.

If an ETF investment is good enough for Warren Buffet, it should be good enough for you.

Expect Losses From Time To Time

The reason why it is usually not a great idea for a new investor to simply put in all his money at the start (or jump in at the deep end) is because we must learn to expect losses whenever we invest (or drown). The blunt truth is that it is not realistic to expect a smooth investing journey where your investments constantly make positive returns.

More often than not, your investments (assuming you make prudent decisions and not simply pick stocks blindly) will pay off over the long run, not the short run.

In our opinion, you should have at least a 10-year horizon in mind when investing in the STI ETF. This would give you enough time to ride out the volatility of the market.

Invest What You Can Afford To Lose

Since we should expect losses from time to time, it is also important to ensure that we invest only in what we can afford to lose. Unlike professional fund managers who may leverage on their existing portfolio to invest more money, normal retail investors like you and I should avoid investing borrowed money that we cannot afford to lose.

If you find yourself struggling to find money to invest, and constantly find yourself borrowing money to make larger investments in the stock market, chances are your problems have more to do with personal budgeting.

Don’t Panic During Bad Times, It Wouldn’t Help 

If there is one thing we have observed from watching professional basketball players plying their trade in the NBA, it is that panicking during the critical period of the game hardly ever helps.

An analysis of the top NBA players in the league (e.g. Kobe Bryant, Lebron James, Tim Duncan) revealed an interesting insight. The best players routinely stick to their regular moves during critical moments of the game and tend to make the same proportion of shots that they normally make. Rather than try something special or unorthodox during these key moments, they prefer to go with tried and tested methods that they are familiar with.

In other words, they simply continued to do what they normally do.

In the same way, when a market crash does happen, most of us would be better off simply sticking to what we normally do. Yes, you should always review your portfolio and constantly find ways to improve your investing strategies. However, that should be done regularly, not only in bad times. A market crash is usually not a great time to start panicking.

Let the over-leveraged fund managers worry about the market crashes and trigger the sell-offs. The rest of us should try to remain calm.

Read Also: 3 Things For Retail Investors To Remember During This Stock Market Rout

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