July 24, 2018

Handling Bad Decline Days

Here’s a typical scenario to test you and your resolve as an investor. Right in the middle of the day, you have a free moment and decide to take a look at your holdings. Because stock info is virtually instantly available these days, after a few clicks, you quickly find out your precious portfolio is down and showing a big loss!

Your reaction may well determine how you will fare as a long-term investor. Your initial sentiment may be a little sluggish and it’s ok as long as you don’t panic and sell. If it makes you feel dizzy and you get sick, maybe stock investing is simply just not for you.

So, the relevant question would be. On paper, would you be willing to deal with a 1000$ loss for the current day? We would, and we are as it often means we will be making much more in the long run.

Our reaction seems easy and simple, but it may not be the case for most investors. Maybe it would be a good idea not to look if you can’t manage your emotions and don’t have the stomach for it. Roller coasters can be a lot of fun for some people but a nightmare for others.

We only look out of curiosity. We are now used to get intraday losses of that magnitude. As we see it, getting portfolio fluctuations above the thousand-dollar range also means we already have accumulated a significant amount. You probably won’t be exposed to these tough-to-swallow declines with a small 10K$ balance. They will become more regular after your portfolio climbs above the 50K$ mark.  

The good thing is, starting your portfolio from scratch, you will have a chance to acclimate to the proceedings as you cope with smaller impact losses. The fluctuations will gradually build up with your portfolio balance. As with short-term losses, gains will also rise up with time, giving you a big smile and a sense of accomplishment.

Unless you are a day trader, losing days should not worry you. Remember that these losses will never materialize if you don’t sell. You don’t even have to pay attention to them. Be patient and good things should happen in the long haul.

In fact, the only productive thing you could do when you witness sharp declines is to look for buying opportunities. As we talked about before, we try to Only React After Having the Facts. So, according to our investing philosophy, our incline would be to buy, or at least, consider buying, after a loss, even a hard one.

All of this is easy in theory and you never really know how you will react in practice. So, to become a good long-haul investor or to know if you can, start small and test your behavior with a real-life portfolio. We still would recommend doing it with money you can afford to lose.

In the investment realm, to achieve long-term success, you have to learn to deal with short-term gyrations, both good and bad, as they cannot be avoided and are part of the investing reality. Essentially, gains make your portfolio go up and losses provide more affordable entry points.

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