This article is a website version of our weekly FREE Best Ideas Newsletter sent on 24.01.2023. Sign up here to get it in your inbox every Tuesday.
How much did you lose last year?
If you lost a LOT, you are not alone. Yesterday I received an e-mail from a reader that lost 45% last year.
That's a hard blow and is tough emotionally, believe me, I've been there and done that.
The impact of a large loss
Minus 45% may not sound like a lot (I have seen funds that lost 68% last year) but it's hard to recover from something like that.
Rem,ember, to recover from a 45% loss you need a gain of 82% (45/55*100).
Imagine you invested $100,000 in the beginning of 2020.
In 2020 and 2021 you're generated at 30% return each year.
In 2022 you lost 45%.
If you sold all your investments how much do you think you'll have?
You now have $92,950. Surprised?
I was when I calculated it, but it makes sense. At the end of 2021 you had $169,000 (100,000 + 30% = 130,000 +30% = $169,999) and then you lost 45%.
As you can see a large loss can knock your returns back years.
Put the loss is in the past
If we had a loss like this, we cannot do anything about it anymore, so the most important thing is what do we do now.
The first problem we have to overcome is that we most likely lost confidence in the investment strategy we were following. This means we are scared of using it to investing now.
And if you start a new investment strategy you going to be very careful, and it will take time to convince you that this new strategy will work.
Take a look at the best strategies
If you're looking for a new strategy take a look at the list of best strategies we have tested, or if you don't have a lot of time to do it yourself, look at the strategy we follow in the newsletter (look at the flow charts at the bottom of the page).
I am not trying to sell you a subscription, just give you an idea of what strategies have worked over long periods an up and down market, and how you can implement them.
Don't look for the strategy with the best return
Whatever you do don't look for the strategy with the best return.
Your goal here is to find a strategy that suits your nature, that you feel comfortable with, because only then will be able to stick with it through good and bad times.
I am sure you know this already - every strategy goes through great and really bad times. That's why you have to be comfortable with it, so that you can stick with it.
Start slow with small positions
Once you found your strategy start with small steps.
With this I mean by only a few investments and if buy, with small positions, half it even a quarter of your normal investment per company.
This will give you time to build your confidence in the strategy and not be disappointed should some of the investments not perform as expected.
Have a clear plan to limit risk
You saw how devastating a large loss can be to your investment returns so you must put a strict rules in place to manage risk.
What you want to do is cut your losses fast and let your winners run.
To do this we suggest that you follow a strict trailing stop loss strategy. You can read more about the research and exactly how to implement it here: Truths about stop-losses that nobody wants to believe
You may also do what we do in the newsletter and that is - stop buying when markets are falling. Research has shown that markets are much more volatile when they are below a simple moving average. In the newsletter we use a 200 day simple moving average.
You can read more about why it is a great idea here:
How to lower your losses and increase your returns
That is all you need to do
That is really all there is to investing.
- Find a good strategy that fits your nature
- Stick to it through good and bad times
- Limit your losses – not to get the highest returns – but to limit the pain of losses so you can stick to your strategy
- Do not get distracted by other shiny things (think crypto)
It sounds very easy but as you know it is harder than it looks.
Your analyst wishing you a speedy recovery
PS I know markets are still uncertain BUT have you already started building your buy list? If not, why not sign up today and start now.
PPS It is so easy to forget and put things off why don’t you sign up right now?