At one point or another, you, like everyone else, will face a loss in the stock market. Whether your portfolio takes a big hit or a small one, it’s inevitable.
There are four types of loss:
Capital Loss: This happens when you buy a stock but the prices go down so you sell it for less.
Opportunity Loss: This happens when you invest in a stock that doesn’t budge over time, but you could have put your money elsewhere, where it would have compounded. While you don’t lose money, you miss the chance to make any.
Missed-Profit Loss: This happens when you hold onto a stock because it keeps climbing, but you don’t sell it fast enough before it drops (the market will always swing up and down). So you lose the difference you would have made had you sold the stock at its peak.
Paper Loss: This happens when you don’t sell a losing stock, so it’s technically only a loss on paper until you cash in your shares.
Focusing on your long-term investment strategy, rather than short-term financial panic, however, can help you stomach any kind of loss and save money. While you may feel pressured to cut your losses, a burgeoning body of research suggests that value investing strategies reap the most rewards over time. Buying and holding out through volatility means that your investments could (and likely will) take a turn for the better down the line.
Ultimately, it’s up to you to decide when to ride the waves and when a loss is a loss. Just don’t lose sight of your strategy.