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How to Avoid and Recover from a Bad Investment

It's easier than you think.

Over the years I’ve coached and counseled people on the emotional impacts associated with poor investment decisions and being taken advantage of, which for some people has lead to a partial or complete loss of their investment.

In one case, an entrepreneur saw his net worth shoot straight up after the IPO of his company. He refused to take any chips off the table because he wanted to see it go even higher. He thought he had “won the game,” when an unfortunate issue surfaced causing the stock to plummet, leaving only a fraction of the value and a huge amount of embarrassment and regret. My role initially was to listen, empathize and validate his feelings. Assuring him that anyone experiencing the same circumstance would be angry, sad, and filled with regret — as he was.

In order to move forward and not allow your own bad choices, or the pain and anger of being the victim of someone else’s manipulation haunt you, you must forgive yourself and others. Otherwise, these negative money memories will linger as toxic baggage that can impact your future decisions and quality of life. We remember losses for a long time, and they can leave a lasting sting. When the time is right and you are ready, let it go, and move on.

Second, learn from your mistakes and don’t repeat them. Investing is full of risks, and so it should be expected that losing money at times is part of the equation. An easy rule of thumb to follow: “When something looks too good to be true, it usually is.” There are no shortcuts in investing. If bonds are paying 3-4% and someone is offering you 6-8%, with less risk, be incredibly skeptical. If your friend has a real estate deal that is a “sure thing,” and will double your money in 3 months, run the other way.

In most cases, significant losses are due to the following 5 factors:

  1. Poor due diligence and trusting people without verifying the facts and associated risks
  2. Investing in areas where you don’t have any experience or expertise
  3. Overconfidence from previous wins, which emboldens you to go step outside of your knowledge zone
  4. Not understanding the investment and doing it anyway
  5. Making a bigger investment than is prudent for your financial situation

Having a skilled and trusted advisor in your corner can help steer you away from most of these potholes.

Originally posted on Quora.

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