Our current economic state is rocky at best. The recent pandemic, political instability, rising inflation, and changing tax regulations have investors on edge, fearing the next disaster will wipe them out. In these unprecedented times, people are looking for investments that give them at least a semblance of peace and relieve them of a constant worry. Yet, investing comes with no guarantees. The stock market is unpredictable, and not even experts can predict success. A shaky investment will eventually cost you money. Whether this loss is immediate or comes later, what matters is what you do next.
Although losses can be painful, you can still alleviate their sting by implementing a few strategies. Understanding how to improve financial stability is one, as it will allow you to withstand market fluctuations better.
Here we outline seven ways to help you deal with shaky investments and minimize any losses they may bear.
1. Don’t hold on to it
In chess, sometimes you must sacrifice a piece so that it doesn’t hinder your progress. Shaky investments are somewhat similar. If you don’t get rid of them when underperforming, they may incur greater losses in the future. A volatile market is natural, but when a company undergoes major changes, holding on to your investments is a bad call.
For example, unforeseen circumstances have pulled cryptocurrencies like bitcoin into broader market turmoil. Those who sold these assets before the market crashed could later invest in profitable stocks and recover the lost capital. If you are in such a situation, knowing how to sell bitcoin can help you get out with minimum losses. Even if you don’t plan on selling right now, arming yourself with this knowledge will eventually prove useful.
2. Change course
A lousy investment shouldn’t put you off from making future investments. Most people wait for a bad investment to turn around before selling it. But sometimes, moving on from your losses and reallocating funds to a newer idea that will earn you more capital is better. Learn from previous decisions and switch to a different opportunity after deliberating carefully.
Asset values keep fluctuating as times change. So don’t let a wrong decision from yesterday prevent you from making an excellent one today. Make sure you do all the relevant research and make an informed choice instead of investing in the first stock that catches your eye.
3. Know your sunk costs and opportunity costs
One of the most efficient ways to deal with a shaky investment is to understand your sunk and opportunity costs fully. A sunk cost is the amount of money that’s irrecoverable. It’s easy to fall prey to this because it is typical to wait to sell the stock until it can make a turnaround. But it can end up costing you even more significant funds. For instance, you buy 10 ‘XYZ’ shares worth $300 each. Suppose its price plummets to $280 a share over the next few days, but you don’t sell it in hopes that it may rise again. Unfortunately, the next day, the cost of a share sinks even lower to $200. Now you end up losing $1000 instead of $200—all because you didn’t sell on time.
Opportunity cost is the loss faced by a particular action or lack thereof. If you end up investing all your savings in XYZ shares, you miss out on the profits from shares you didn’t invest in. Therefore, spreading your investment funds across various companies is wiser to avoid significant losses.
4. Understand tax-loss harvesting
When an investment loses its value, it can still be of some benefit. Transforming it into a tax-winning strategy is known as tax-loss harvesting. It allows you to sell stocks or shares going down and replace them with similar investments. Doing so offsets the capital gains from these other investments, meaning you spend lesser money on taxes and have more capital stay as an investment. Although you can do this any time you wish to, it’s better to wait till the end of the year. First, analyze how the market is doing and its effect on your shares before implementing a tax-loss harvesting approach.
It’s important to understand that tax-loss harvesting won’t restore your capital to its original value, but it can significantly cushion the severity of your losses.
5. Seek help from industry professionals
Sometimes it’s better to let the experts do their job and do what they know best. A shaky investment may already put you in a bad spot, and you don’t want to dig a deeper hole by making another poor decision. A financial advisor can help you develop a workable plan using various approaches that align with your short- and long-term goals. Although your advisor may force you to face some hard truths, it’s for your benefit and keeps you from repeating the same financial slipups twice.
To truly benefit from experts, ensure you’re open with them about your investments and current financial state. Pick someone you can trust so that your working relationship can prove beneficial.
6. Do your due diligence
Bad investments can also happen to those who’ve been in the industry for decades. But they often result from poor or hasty decisions without preemptive measures, risk analysis, or research. If you want to deal with your poor investment, you must pay your due diligence before you start making any other decisions. Monitoring trends and looking at a company’s historical data can offer valuable insights and provide a clear picture of how to invest your capital. In contrast, spur-of-the-moment investments that may seem exciting can be extremely risky and make you lose your hard-earned money in no time.
7. Set realistic expectations
It’s important to set benchmarks for yourself against which you can assess how well or poorly your investment is doing. Don’t overdo your expectations. Set realistic goals and clearly define what they mean. The further your investment lags behind a target, the quicker you’ll consider taking serious action.
Investing and understanding the market is a challenging and risky business. Its unpredictability may tempt you to join, but it might be your downfall.
While a shaky investment may not define you, what you learn from it does. Understand the risks and vulnerabilities in the system, stay secure in your financial standing, and then see how an investment becomes a lot more profitable.