No one gets into the trading and investment game to make a loss. Everyone is out to make as much as they possibly can. New investors are often very eager to get into the ring and land a couple of knockout investments to build a formidable portfolio.
However, these are the guys that often get ahead of themselves and make a bad investment mistake. If they aren’t careful, they could end up losing quite a bit of revenue.
The money they initially lose could be just the tip of the iceberg. The damage may run much deeper. When the costly error is investigated, most investors would think twice before making an investment error.
Suppose you invest a moderate $10,000 and a few months into your investment, the company files for bankruptcy and you lose everything. For all intents and purposes, your near-term loss is all of the money you invested.
However, when you look at the long-term ramifications of the poor decision, you quickly realize that you lost way more than you bargained for. If your money was compounded by 20% annual rates, your long-term losses over a couple of years could shoot up to a mammoth $2 million.
The S & P 500 providers have an annual return of around 10%, which is much less than the aforementioned 20%, but the eventual loss is considerably more than $10,000.
If the average annual return rates were only 10%, the investors stood a chance of being $700,000 richer over the course of 45 years. Although you might think that there is no guarantee that your stock would recover if you suffered a loss, you should remember that the chances of the stock recovering is more likely than not.
Time is money
Losing your money is one thing, but saving up to recover the initial loss is a whole different ball game. One has to take into account how long it would take an investor, who is in his or her 20s, to make that cash again.
Typically, young investors have very little money to build their portfolio and buy stock. It is in times like these that they opt and apply for margin. Often, they buy more than they really should.
If that $10 000 mistake happened to you, the near-term losses are very obvious. Apart from the money that could have been made, the investor needs to pay back the margin. In the same vein, they would also have to start saving up for new investment.
That is easier said than done seeing how new investors are often still young. The amount of money that they have to save and invest is limited. After daily living costs, a typical study loan and rent, there would hardly be enough money to save for investing. If the investor happens to save $500 a month, it would still take him or her 20 months to save up the money for a new investment.
Focus on the weak spots
Contrary to belief, it makes more sense to focus on the losses than the possible profit. Benjamin Graham, the father of value investing, revealed that the investor who focuses on his or her losses is more likely to make a success out of trading.
The trick is not to spend your time sulking on your losses, but rather analyze the situation to try and minimize the loss as much as possible. After all, every investor will lose some money at some point, the trick is to try and soften the blow.
The guys on the big screen sell a very exciting stock exchange story, but in reality, going for the safer bet is more likely to lead to success. That gives you better odds than going for a high-risk entity and hoping things won’t go south on you. If you choose your stocks well, it could lead to improved stock market returns.
Compound interest is an investor’s biggest friend. It creates a passive environment where the money will grow by itself. Compound interest is not going to make you rich overnight, but it could make a massive difference in a couple of years. The best part is that interest grows on interest and before you know it, you have one healthy portfolio.
These tips aren’t necessarily going to work for everyone. But like they say, “different strokes for different folks.” Drop a comment down below or share your story. If you want to know about how to avoid dangerous investment mistakes in the future or if you want to learn more about investing, check out The Chartist investment newsletter options.