Recently I experienced my first REALIZED stock market loss, friends. I’m emphasizing the word realized because you can’t really say whether you gained or lost money until you SELL your stocks. I was kind of holding out for these stocks to take a turn for the best, but I literally needed to cut my losses in this case.
Here’s what I learned:
- I bought these stocks a little over a year ago the day after the Brexit vote. The markets were dipping and since I had gotten so lucky buying stocks in the recession of 2008-2010, I wanted to take this opportunity to buy some stocks on sale. But my research was hasty, I had not done my due diligence to read up on stocks, watch them for a while, confirm they were a good buy, determine the right price and be ready to buy once it hit that price. I narrowed my sights on high dividends, which is not an indicator of a great stock. So Mistake #1 was a lack of research and hasty buying. To be honest, these days, I don’t have the time to properly research and watch individual stocks that I had nearly 10 years ago. Life is different, so my investments should be different. If you’ve read my other posts, you know that I’m more into a good old instantly-diversified S&P index fund. If you’re investing in individual companies you need to do some homework (and keep doing homework even once you own the stock) and make sure the company is in good shape and is poised to deliver good earnings in the future.
- I waited until I had the stocks for more than a year to sell. I knew from selling for a PROFIT that it was better to have “long term” (ie more than a year old) gains than “short term” (less than a year). You pay less tax on the profit when it’s a long term gain. So I dumbly assumed I would get similar tax advantages if I had long term losses. But nope! Apparently it’s quite the opposite when you take a loss. You get more tax advantage for SHORT-TERM losses. Mistake #2.
- The mistake I will NOT make is dwelling on this loss and letting it get me down. You can’t get emotionally-involved in investments! All my finance books have said that every investor takes losses at some point. I had a good run, but I was bound to lose at some point. I’m learning from it and moving on. And luckily, I have this blog and all of you to force me to really contemplate it so I can try to educate you to not make the same mistakes I did!
Final thoughts: If taking a loss scares you to death, or you know you can’t afford it, then you should NOT be in the market, or making any kind of investment. This involves loans to friends and family. If you can’t afford to lose that money if the person doesn’t repay, then you should NOT be making that loan! Remember, my non-retirement stock money is my “play money” that’s leftover after all my expenses and bills are paid and savings allocations made. I have an 8-9 month emergency fund and no debt besides my mortgage. I don’t need this stock money within the next 5 years. All of those reasons are why I can afford to invest in the market! Don’t feel pressured to invest if you’re still working on other financial goals, you’ll get there! Especially if you keep reading this blog 🙂