How to get back into investing after a loss
When an intimate relationship breaks down, the temptation to jump straight into another one to account for the pain of the loss is very strong. This results in us considering partners who we may never have considered before.
They are often less compatible, less stable and much riskier, but we jump in anyway because the pain of even more loss doesn't seem like such a gamble against the potential to make up for lost love.
Sadly, though, these relationships often don't work out and can sometimes leave you in a worse state. So predictable is this phenomenon that we even have a term for it - the rebound relationship. It turns out we do exactly the same thing when we lose on our investments.
When we lose a significant amount of money, it hurts. So, we often hold onto investments for far too long to avoid further loss, and then at some point realise the investment simply is dead.
The emotional pain of the loss is real, so we look for ways to alleviate that pain and, as in the rebound relationship, we often rebound into another investment in an attempt to alleviate the grief.
When we do this, we are much more likely to consider investments we would never have considered before - they are riskier or in businesses we don't understand, or we fail to do the appropriate background research. And like the rebound relationship, the rebound investment often leads to even more losses.
In psychology, this effect is called loss aversion. Our brain is hardwired to experience painful emotions when we lose something, so to avoid this pain we favour behaviours and decisions that seem less likely to end in pain - it makes us loss averse.
When we are already experiencing the pain of loss, however, the fear of it no longer exists, and our natural defence mechanism against poor decision making is lowered. We have no more pain to avoid, because we're already feeling it, so why not gamble on something super risky that may alleviate the pain?
This is classic loss aversion, and we see this play out in business, relationships, investing and social interactions all the time. Controlling these knee-jerk reactions, and mindfully managing yourself through the grief, is key to avoiding bad decision making in the face of significant loss.
As a psychologist, I have helped many people work through the loss of a close relationship. As a behavioural economist, the way I help people mitigate for the investment rebound is summed up well in the three tips below. This is not comprehensive, of course, but it's a great start.
1. Create some financial guardrails to allow you to blow off steam without guilt
Set a budget for yourself to spend simply to get the reactive impulses out of your system. Make this as small as you can, but allow yourself some grace to blow off some steam.
In this way you make the decision to part with this money before you have the chance to gamble it, which will lessen any hurt or guilt you may feel. If you do this consciously, you at least give yourself a chance to limit the damage.
If you don't do this, your subconscious is likely to take control and get you into hot water. Of course, you do need to be careful, so set your "feelgood" spending budget with your partner or a good friend who can help keep you in check.
2. Use "At least ..." statements
Using statements that start with "At least ..." is a terrible idea if you are trying to show empathy or build connections with people, but they are brilliant when you want to try to disconnect from your emotions.
As an example, imagine there is a market crash and you lose 50% of the value of your portfolio - this hurts. Learning to say, "At least I have $X investments", or "At least I'm not doing as bad as X", or "At least I have a good family and a roof over my head" is a good way to disconnect yourself from your feelings of grief and loss and reset your mindset.
Of course, it's not a magic bullet, but it's amazing how effective this simple trick can be in the moment. It can also be a good idea to write an "at least" list of all the things you are grateful for. Count your blessings, as my grandmother would say.
3. Give grief the time it needs
Sometimes, just giving yourself space can be the best tonic for better decision making. Take a breath, go for a walk, commit to making a decision tomorrow, next week, or however long you need in order to process the grief.
You always have more time than you think, so use it to your advantage.
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