Many people who have tried their hands in the stock market in the past often tend to equate investing in the stock market with gambling. This is because several of them have lost their money in the stock market. The reality of investing in equities (stock market) is that there will be winners and losers as the stock market is a fair game.
It is not possible to always be on the winning side and follow the dialogue of a Bollywood movie, “sometimes to gain something, you have to lose something.” So if you have lost money in the stock market or are afraid of investing due to the fear of losing, continue reading this article which will help you recover your losses from equities.
Step 1: Analyze what went wrong.
Whenever we lose in the stock market, we tend to blame the market, the big players, destiny, and even god rather than ourselves. We must take responsibility for our losses as it will enable us to be more responsible with our money in the future.
The following are the most common reasons why people lose money in the stock markets:-
- Making a panic move (crash during March 2020 is a great example)
- Staying put in a fundamentally and or financially weak company with the hope it will recover instead of reducing losses.
- Failing to conduct their research and instead of trusting some random individual on WhatsApp/telegram group or the self-proclaimed market experts on social media sites.
Once we understand the error made on our part, we can ensure that we do not follow the mistakes in the future and not trust the random self-proclaimed market experts. Avoiding the herd mentality and making a panic move is very important.
If you had sold your investments in the crash of 2020, you would have incurred losses; however, if you would have stuck to your investments, there is a significant probability that your investment value would be shining green. When you see a fundamentally weak company, and yet you decide to stay put in it with the hope it will recover, well, I have some bad news for you.
Most fundamentally weak companies (very high debt, significant losses) do not recover and will tank your investments, so better to get out of them as soon as possible to avoid more losses.
Step 2: Avoid overtrading to recover the loss
If you have taken a loss on your portfolio, you may be inclined to redeploy your capital in such a way that you aim to recover the loss in a week or a few days. Well….. You may be inviting trouble for yourself. Overtrading is like you being a rookie wrestler and you challenge Bajrang Punia or Ravi Dahiya, it’s not going to go down well, and you may end up hurting yourself.
Every transaction you make in the stock market has certain costs associated with it while buying and selling. These costs end up eating into your returns in the case of regular trading, which reduces your returns.
The simple thing to follow if you have booked losses in the market is to wait for the right opportunity. Do not be in a rush and exercise patience, which is crucial for the investors in the market. To quote Peter Lynch, “If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over the time you’re patient. You need to find a few good stocks to make a lifetime of investing worthwhile.”
Step 3: Adopt a stop-loss strategy.
First, we should know what a stop-loss strategy is. It is a strategy where if the stock price falls below a particular point, you will sell it to minimize the losses. Several people preach about stopping loss, but only a few implement it. So it is possible a stock that has fallen in value may not recover to the price you bought it at, and the price keeps falling while your loss keeps widening (Vodafone-Idea and Yes Bank say hi!).
To recover your losses, it becomes essential to reduce your losses first. The losses can erode your investments in the blink of an eye, and you may regret it for your life. So when entering into a stock, always assign a stop loss to it so that you do not have to worry about losing your entire investment.
Step 4:Manage your risk
Suppose your entire portfolio is made up of only one stock or maybe stocks in one industry like banking, well. In that case, you are making it difficult to recover your losses. Exposing your entire capital to only one stock is waiting for a poisonous snake to bite you, one bite and instead of the London Bridge, your portfolio value is falling down (you know the song, right?).
By being exposed only to one industry also the risk is high. Bad news for the industry and the stock prices may tumble. For example, the semiconductor shortage has led several automakers to cut down on production, which reduces revenue and, therefore, the stock price. The banking industry is also looking at high NPA’s due to COVID19, making them a risky proposition for now.
It is important to note that when there is a market crash, most of the equities fall while gold prices rise. Therefore, investors should diversify risk by holding different assets like stocks, debt instruments, and gold that can help them recover losses or minimize them even if one falls.
Step 5: Accept the reality.
The stock market is not a get rich quick scheme, and if you are in to get rich quick, the chances are you may never recover your losses if you incur, especially if you follow ideas on WallstreetBets and invest in meme stocks (read about the GameStop and AMC saga) or follow an apparent visionary (the MUSKular man) who is the founder of revolutionary electric vehicle company and plans to establish a colony on Mars and advertises crypto which may resemble a Snapchat filter.
It is essential to accept that you cannot win all the bets you make, you will win some, you will lose some. As a result, deploy the capital to the extent to which you are comfortable and do not need it immediately. Suppose there is a loss in the short term. In that case, you can either wait for it to recover if it’s a fundamentally strong company or exit if you feel it will never recover. The important thing is also to trust your gut.
In the stock market, you will incur a loss today or tomorrow, but it is essential to know how to face it and recover from it. Be smart with your capital deployment, do not follow the herd mentality, do your diligence, and most importantly, analyze why you lost to avoid the mistake in the future.
Diversifying the portfolio is essential as well with different asset classes, which will enable you to reduce risk and recover from losses better.