Don’t you hate the money equation dictating that it takes twice as much gain to recover from a financial loss? It doesn’t even seem to make sense, but it’s unfortunately true.
Here’s what I mean: If you lose 50% of your retirement account, for example, then you have to earn 100% to get back to break even. Let’s look at a real scenario.
Susan has $500,000 in her retirement account that is invested in the stock market. She doesn’t think too much about it because her plan is to let that money grow over time, and she’s aware that the stock market fluctuations.
Before she knows it, the stock market undergoes an extended bear market due to a change in the economy. Susan’s account drops by 50% to $250,000 eventually. The market finally bounces back, and rises by 50%. Two years later, the value of Susan’s account is $375,000.
How can you avoid a similar fate as Susan? Here are a few suggestions:
Always check the value of any investment before buying into it. Where does the asset stand in relation to historical values? This information is readily available online, or from your financial advisor if you work with one. Really and truly though, you probably already know if a particular market has been strong for several years. It may just feel like you don’t know when it comes to investing your life savings because of the emotions that we tie to our money.
If you invest in the financial markets, learn some very simple charting basics if this appeals to you. It’s definitely not rocket science! I read charts, and I’m neither scientific nor technical. They are actually rather fun, and remember that a picture paints a thousand words.
Never put all of your eggs in one basket; so simple yet so true.
If you have chosen the buy and hold method that rides out market downturns for your investment accounts, find out how much that particular type of investment has decreased in prior corrections. Get a feel for whether you can stomach such a drop. If you can’t, consider a stop loss, meaning that your investment will be sold if it drops by a certain percentage that you choose. This can be done by a financial professional or by you. While you could end up buying back into the investment at a higher price later, you will have slept well. But, you could also have avoided a much larger loss. Think of it as insurance.
Remember, it’s your money. Use the same diligence with the care of your money as you do other things that are important in your life. Nurture and grow your money so you can have what you want that it can buy; again, incredibly simple but so true.
I’d love to hear your comments below, especially what you think about learning to read stock charts!