What to Do When Losing Money in Stocks?
There is only one intelligent thing to do when losing money in stocks -- sell. There was only one reason why you bought -- to make money. If you are losing money instead, the stocks are doing the opposite of what you expected. Something did not work.
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Cut Your Losses
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You never know how low a stock will go. Any stock can go down to zero at any time for any reason, but even a diversified stock portfolio, or the market as a whole, can suffer devastating losses. In 2009, the market undercut its 2002 lows, so if you'd bought stocks any time between 2003 and 2008 and held them "for the long haul," you would have been in the red by March 2009. True, the market has recovered since then, but bottoms are reached when the largest number of investors sells, so chances are good that you would have sold at a loss in March 2009 and been too slow to get back in.
Consider the Math
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If you lose 10 percent, you will need to make 11 percent to make up for the loss and break even. If you lose 50 percent, you will have to double your money to break even. The larger your loss, the harder it is climb out of the hole, so it's best to cut your losses while they are still small.
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Cut Your Losers, Let Your Winners Run
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Sometimes the people who make the most money are those who lose the least. Successful traders do not always pick winning stocks. They make many mistakes and sustain numerous losses. But the difference between professional traders who make money year in and year out and amateurs is that the professionals cut their losses ruthlessly early on.
Don't Try to Find Out "Why" Before Selling
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We all want to understand things, but in stock trading, trying to find out why something is happening before acting can be costly. The real answer may never be known, or the explanation can come too late, after the damage has already been done. Sell first and ask questions second. You can always buy back if it was a false alarm.
Analyze Your Mistakes
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Assigning blame may give you instant satisfaction but won't prevent you from making the same mistakes again. Best to ask yourself what you did wrong. If you bought at the wrong time, when the market was declining, figure out what signs to watch for so that you won't make the same mistake again. If you followed bad advice, ignore it the next time and find a better source, or, better yet, learn how to do things yourself. If you picked the wrong stocks, find out what was wrong with them and avoid similar situations in the future.
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