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Losing money on an investment is inevitable. That doesn't make it any easier.
In our journey as physician investors, we have certainly encountered times when investments have not performed as expected, potentially resulting in losses. I have suffered losses in the past and I know I will in the future. How we handle these situations can significantly impact our long-term financial success and ability to live the life we desire.
The investment may have plummeted due to an unforeseen market crash or for some other reason entirely. Many of you have experienced an investment loss before, whether you are new to investing or have been investing successfully for years and have multiple sources of income. It can be humiliating.
Regardless of how it happens, how we react and recover is important. There are ways to both change your attitude toward loss and change your financial behavior so that you can hopefully avoid big losses in the future. That's what we'll focus on today.
It's time to expand our investor toolkit! Let's explore the actionable financial steps you can take to invest smart after a loss on an investment.
Finding the right attitude
Before we talk about actionable strategies, dealing with loss really comes down to having the right mindset. The basic process is using knowledge to move from shame, intimidation, or frustration to a sense of community and trust.
How can you do that? First, realize that it's OK to feel humbled – or even scared – by an unexpected financial loss on an investment. These hard feelings are our brains' way of telling us that this is a learning opportunity. In every aspect of our lives, we learn our most valuable lessons when we go through humiliating experiences. It's a survival mechanism, an “I don't want to feel that way again” feeling that (hopefully) leads to different outcomes next time.
Furthermore, it cannot be stressed enough that losing money in investments happens to everyone. We all have to deal with unexpected setbacks and try to figure out how to invest smartly. When you realize that you are not alone – and I would even recommend joining communities of like-minded investors to realize that you are not alone – it makes diving back into your next investment far less scary.
And why is it important not to let setbacks discourage you? You have financial goals and are trying to build a life of lasting wealth. If a setback knocks you off track and you can't get back on track, your dream life may remain just a dream that's out of reach. Instead, stay on track to achieve your dreams.
Finally, accept that we cannot accurately predict the direction of the market (although you can develop a keen sense of its cyclical nature). When things go down, they usually go back up. That's why you must not let losses intimidate you or stop you from continuing to invest; after a loss, there is usually an uptrend. And at the end of the day, the gains far outweigh the losses. This is especially true if you have the right mindset and a solid toolkit of fascia strategies.
Here are some things to think about when we experience a loss while developing the right attitude:
- Acknowledge the loss: Understand that losses are a natural part of investing without dwelling on them too much or letting them cloud your judgment. This balance allows you to view setbacks as learning opportunities for growth in your investing journey.
- Focus on what you can control: What specific steps can you take to move forward? Focus on the factors you can influence, such as reviewing your investment strategy, diversifying your portfolio, or seeking professional advice to help you stay the course.
- Limit what you cannot control: Some things are out of your control, like market fluctuations. Try not to fixate on them, but rather prepare for the possibility of future fluctuations. Make a plan to offset your risks if they happen again.
- Learn and adapt: Thoroughly analyze what went wrong. Assess the root causes and identify lessons you can apply in the future. Be open to adjusting your investment approach or refining your financial goals based on new insights as you begin to make adjustments for the future.
- Think long-term: Understand that markets have ups and downs and that short-term losses do not reflect the long-term potential of investments. Focus on your long-term goals and stick to your strategy.
Your next financial steps
There is a difference between unexpected investment losses and situations you didn't really think through. You learn from one, the other may have been doomed from the start. Don't get used to the second style of investing, because you will keep making the same mistakes.
Trust me, I've made investment decisions like this where I didn't really know what I was doing, where I just blindly invested money (and then lost it), then frantically tried to figure out what went wrong. I can tell you from experience that's not the right way to go.
Instead, be proactive to minimize future investment losses while setting yourself up for future success. Here are some strategies to consider:
Capital gains, capital losses and tax aspects
Some losses can be offset by tax incentives.
If you don't know, you may be able to deduct your investment losses from your taxes. This allows you to offset your losses through depreciation. This can create a positive snowball effect where you can reinvest the money you save on taxes and increase the return – bringing you closer to your goals.
This can get complicated, so work with your CPA or tax strategist to understand IRS regulations, the concept of loss relief, the wash sale provision, and how these and other factors may impact your tax planning strategies.
Get involved in networking
Here's a tip: Try not to make all the mistakes yourself. First, learn from the mistakes of others.
If you're facing an investment loss, consider networking with other investors to accelerate your financial education. Bring your situation to a financial community to examine, discuss, and plan next steps. Many investment communities spend time sharing their financial setbacks with each other (in a judgment- and shame-free environment) as part of the overall goal of financial education. I meet with a group of investors quarterly. There, we don't judge. Instead, we discuss what we've learned and try to support each other. Being in a room with industry experts and experienced investors will give you valuable insight and perspective.
Here at Passive Income MD, there are many communities, events, conferences and resources. Consider joining one or more of them. We hope to see you soon!
Advanced risk management and hedging strategies
Explore advanced risk management techniques such as options strategies to hedge your portfolio against downside risks, or use derivatives or structured products to mitigate specific risks.
And regardless of the strategy, it is always an important hedge against risk by diversifying your portfolio. This way you are protected from market fluctuations.
Diversification could also include investing a portion of your portfolio in alternative investments such as private equity, venture capital, hedge funds or real assets. Another option is to implement dynamic asset allocation strategies, which adjust portfolio allocation based on market conditions, economic indicators and investment opportunities.
If you are unsure about any of these steps, you can join the Passive Real Estate Academy waitlist or contact your financial advisor to learn more.
Capital preservation and liquidity management
Prioritize capital preservation by reassessing the risk-return profile of your investments. Once you do, reallocate assets to safer and more liquid options during times of uncertainty.
Not only does this protect you from future losses, but it also gives you the opportunity to use market declines to your advantage. Market declines are usually the best time to invest in undervalued assets that can drive up the value of a portfolio.
Debt management and leverage adjustment
Evaluate your debt levels and leverage ratios. Then consider reducing debt or restructuring debt to improve financial stability and mitigate risk. This is especially useful during times of volatile markets.
Additionally, explore your options for refinancing, debt consolidation or refinancing to reduce borrowing costs and manage cash flow effectively.
Stay on your investment course
If you want to achieve your financial goals, you should keep investing despite losses. There is a way to do this while limiting risk and making a significant financial gain. If a loss makes you unsure about continuing to invest, come back to this blog.
And if you're looking for a community that supports and encourages the steps we've talked about today, consider joining our Leverage & Growth Accelerator and PIMD Momentum MD Mastermind. Here you'll find resources and mentorship to help you stay on track on your investment journey. It's a place where your ambitions are understood and your efforts are valued.
I hope you continue to invest carefully and benefit from Passive Income MD. This knowledge can change lives. We here at Passive Income MD are honored to continue to support your big ideas and financial goals on your journey to building your dream life. Until next time, I look forward to seeing your progress. Keep up the good work!
Peter Kim, MD, is the founder of Passive Income MD, the creator of the Passive Real Estate Academy, and provides weekly training through his Monday podcast, the Passive Income MD Podcast. Join our community in the Passive Income Doc Facebook group.
Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
