Loss is something we all must face in our lives. Personal, professional, fiscal, all of it. Just because loss is universal though, it does not make it any easier. This is especially true in the markets. While you may think loss is only when you sell a security or commodity at a loss, there are several types. All of these types of losses in the market can cause increases in stress and irritability, but lucky for us we have our mindfulness to help us through the losses we will inevitably have.
The first types of losses are capital losses. These are when we buy at a higher price than we sell for. This is the done deal, game over, but it can also be a strategy to avoid getting too deep. Before investing in anything you should have your limits set of when you will sell, both when things are going well and when things are going not so well. This means capital loss is sometimes necessary in order to avoid further losses and also to be able to maximize your money further which brings us to another type of loss, opportunity losses.
Opportunity loss is when you leave money for a long time tied up in an asset that doesn't perform well. Maybe you will tell yourself that no harm, no foul, you didn't lose anything or you even made 5% but what did you lose from not having that money work harder for you? This is a real FOMO moment. It can be hard to quantify, maybe you would have lost more than you had hoped had you been trading more aggressively, but if your asset under performed even a safe bond then you know you likely messed up.
The third type of loss can be linked to our limits we place on selling. Say you decided to sell your security after you got a 20% return but then out of nowhere it becomes a meme stock and rises 200% right after you sold. Or maybe you held for 300% but it came crashing back down and now you have to wait for a whole other run again. This is a missed profit loss and one of the hardest in my opinion. It can make you rethink your methods entirely after suffering a few of these and make you afraid to sell no matter how high something gets. But if you hold for too long you run the risk of getting into paper loss territory where your security crashes so hard and you're so negative but you tell yourself that as long as you don't sell, you officially didn't lose any money. But as we just went over, leaving money tied up in an underperforming stock is a loss in and of itself as well.
As a newcomer, it can sometimes be easy. A little beginner's luck and no experience can make setting limits a breeze. But after a few of these losses, holding onto a stock too long or not long enough, seeing something you had a feeling on shoot up before you got in, it can start messing with your mind. You start second guessing yourself and losing your edge. How do you get the mojo back? The answer is to not rely on instinct alone but knowledge. Study your charts, read the news, read the analysis, make an educated prediction and set your limits where you will be content no matter what the outcome is. Remember that the market always goes up over time so of course a stock will continue to go up after you get out of it, you can always find an entry point and get back in later. The solution is not letting the money sit in there for years with little to no growth, but to understand and work with the market changes.
It is also important to not let a loss define you. As you make bigger trades you will lose, you may lose big, but this isn't who you are. Remember that the point of trading is to create wealth, you can always create more wealth. Yes as part of the creation process you will lose some, but the important thing is to keep minimizing losses and maximizing gains. Never invest what you can't afford to lose and always make educated trades. Before entering or exiting the market, have a clear strategy on the whys and hows, don't just simply get in and see how it goes. Loss will happen, so will gains, it is important not to let either get to your head or dictate your trading decisions. Educate yourself, practice your mindfulness and trade from a place of serene knowledge. Reach out to us with your comments or questions at info@bullionite.com.