Facing the fact that you have made a bad investment can prove to be difficult and stressful to you. But before you panic and rush to buy or sell, think of some beneficial alternative. Remember your dreams and emotions that are attached to your investment plans, after all the reason you bought the investment was that you expected to make money out of it. I understand when your stocks or funds move towards the other direction, it can be a bitter pill. Don’t lose your mind even most experienced investors make bad investment. All you need to do is evaluate your investment honestly. To ease your mind here are five steps which you should follow in order to recover from a bad investment.
1. Always Set your Realistic Performance Expectations
Before you plan for recovery, take a step back and think, was your investment really that terrible? This will Cleary give you a definition of the bad investment.
You may find reads of famous investors who say that they never make less than 30% in a year but trust me for the average investor who can’t spend his busy day in researching stocks and making trades, these kinds of figures may not be real at all.
There is one benchmark (among others) that can really help you to evaluate your investment and that is S&P 500. Wondering how it works? Well, if these 500 stocks averaged an overall return of 10% during a certain period and your investment made 5%, then, yes, your investment underperformed. However, if you still managed to make money, before labelling it as “bad Investment” I would suggest having second thought. You need to understand a difference between “less good” and “bad.” on the other hand, if one of your investments lost 10% during this same period, you certainly moving into the “bad” investment world. So, before jumping into any crucial decision always try to frame your realistic performance expectation as sometimes it is not as bad as much as we think.
2. Always try to avoid rush Selling OR Buying
Imagine one morning you find your stock has dropped to 20% overnight. So, what will you plan to do? Will you sell all your shares or Buy more?
Well, the best option is to wait. Buying or selling your shares in a panic situation is always risky. If you still want to jump into buying or selling world then do it with a proper research.
3. Learn about benefits of Tax-Loss Harvesting
Tax- loss harvesting is a magical strategy that will help your bad investment to do some good in the market.
Tax- loss harvesting works on a simple principal where you sell an investment that has declined in value to realise its capital losses and offset the capital gains of other investments.
Many long term investors make use of this magical strategy. All you have to do is simply replace the investment you sold with a reasonably similar investment.
Feeling relaxed? But there is one important thing Tax-loss harvesting strategy isn’t allowed by the IRS to you if you buy and sell the exact similar investment or a “substantially identical” investment within a 30-day period. To settle this challenge you can replace your individual stocks with mutual funds or ETFs in the same industries.
If this all sounds a little complicated, the good news is that you don’t have to do all of this yourself. For many investment advisors and robo advisors, tax-loss harvesting is a core part of the standard services they offer.
4. Prioritize Diversification Moving Forward
It is advisable to have diversified investments. According to the experts you should never invest more than 5% of your portfolio in a single security. Diversification minimizes risk of bad investment. The best way to diversify your portfolio is to buy mutual funds or EFTs. This can make you an owner of tiny pieces of hundreds or thousands of companies. So, always think of smart investing instead of traditional investing.
5. Seek Consultation from financial advisor
You can gather investment information through online mode but expert’s advice can really play wonders. These magicians can handle your bad investment with proper assistance and comprehensive financial plan. They will build a diversified investment strategy that matches your goals.
Before saying yes to any financial advisor do a proper research, check the ratings and compare the same, never settle for less.
These were 5 magic steps to change your bad investment into a productive one. For further queries get in touch with us!