How to Stay Calm when your Investment is Down

Let's start with a story. Tell me if this sounds familiar.

You bought your first stock or cryptocurrency on Monday, and by Friday, it is down over 15%, then you begin to panic.

"Did I make a mistake?" "I’m going to lose everything!" "I’m an idiot!"

You check the stock message boards and Twitter to see what other people are saying. The first 3 comments you see are: “This stock is going to zero.” “Total garbage.” “Only a moron would buy this coin.”

These comments reinforce your thoughts that you might have made a mistake.

You look at the top winners in the stock market and see that some unpopular company is up 20% for no apparent reason.

Now you’re really annoyed.

And maybe you sell.

Months go by, and the stock/coin stays flat. You think you made a good decision. But then something happens. An earnings report comes out, and the company has blown away expectations, or some company endorses that coin. The stock/coin jumps 30%.

You’re angry and want to buy back in, but months of red have conditioned you to believe that the stock will drop back down again.

So you wait.

But now, the stock is creeping upwards every day.

You didn’t buy on Monday, and now the stock is more expensive on Friday.

Thinking you’ve missed the boat, you start looking for a new stock. After doing much research, you find what you believe is a great opportunity.

You buy in and the cycle starts over.

This is an all too familiar tale for many retail investors. It leaves us thinking, "if I had known," "if only I were more patient". Well, here are 5 tips to help you do just that:

1. Do your research BEFORE you invest

If you did your research before you invested in a company, you already know what to be excited about. Are you excited about the 5 to 10-year future revenue prospects? Or a new technology in the works that could revolutionize their field? Then you know that any bit of news that does not directly affect what you are excited about is just fleeting noise, and you have nothing to worry about.

When you do your research before you invest, it also reduces the mountain of self-doubt that comes with investing. When you research a stock while it is down, chances are, the sentiment you will see around the stock will be negative. 

While you're thinking to yourself, “I’m an idiot! I’m going to lose everything!” You check stock message boards & see comments that reinforce that negative sentiment.

It's a lot easier to find information that confirms our bias than we think. When you are worried about something, it's easier to find more things that will make you concerned than things that will reassure you.

Market sentiment is very fickle. One moment, everyone is gushing about Tesla, and the next, they're all about Dogecoin. It's easier to understand what there really is to know about an investment when you have no skin in the game. When you have no skin in the game, you have nothing to lose (yet) and everything to gain (if you make the right decision). So, you have a healthy level of skepticism while you're also willing to listen to optimistic projections and a healthy level of optimism when listening to doubtful ones.

Since 2020, it seems like the entire investment space has been turned on its head. This Saturday, I'll share my thoughts on how investors and people looking to invest in the US stock market should treat their stock portfolio and my stock investment strategy for this year. You can register here. It's a 1-hour discussion that'd run from 3 pm - 4 pm GMT. Come with a friend and bring questions.

2. Everything is not always what it seems

While the market should run on fundamentals and the stock price should increase if the company's revenues increase or there's increased demand for the stock, this doesn't always happen and not to the scale that we expect. Why? Because stocks can be manipulated (legally). One of the many things the Gamestop saga taught us was that there are legal ways to put downward pressure on a stock, thereby causing the price to drop faster and by a larger amount than it should.

Here's a hypothetical example:

Let's think back to October 2020; let's say one of the Biotech companies working on a vaccine just announced that their vaccines failed a phase 3 clinical trial.

That's bad news, but how bad is it?

What were the projected sales of that vaccine? How big a hit is this?

What often happens with manipulated stocks is that they drop a lot more than they should when bad news is released. Manipulators know you’ll be upset, so they’ll hammer the stock as hard as they can.

Say the company was worth $10 billion yesterday.

Today the bad news drops, and the stock price is down 10%.

That’s a market cap loss of $1 billion.

Ignore the market sentiment and do some analysis. Is a drop of $1 billion warranted? If the product that failed was only ever projected to bring in $250 million total at its peak, then the stock could be manipulated.

3. Even if the stock is not being manipulated, realize that just like people, investments can and do overreact

Using the same hypothetical example as in 2: it is also possible that the stock is not being manipulated, but people are overreacting, or the amount crosses the "stop-loss" for a large number of people causing a massive sell-off.

Any news around the vaccine and COVID as of 2020 was bound to get a massive reaction in the stock market. Given that sometimes, there was no way to understand the direct impact of each announcement, there were times where people overreacted by selling stocks they should have held for a few more months in response to some news that had minor temporary impact.

N.B: A stop loss is simply an instruction given to your investment broker to sell your stock if it drops to/below a certain price. For example, If you use the Robinhood app to invest in a stock that is currently being traded at $10 and you set your stop loss for 20% below market price or $8, then if the stock falls to $8 or $7.8, the app will automatically sell those shares at the current market price.

In this case, just don't overreact. Sit back and relax. Your investment will be better than fine in a couple of months.

4. IGNORE IGNORE IGNORE, do something else, look elsewhere

Do you know what they say to do when social media is getting too bad for you? UNPLUG. Think of something else. This is a lot easier to do when you don't invest money you need in the short term in high-risk investments. If you need the cash you invested in a week or even a month, it would be a lot more difficult for you to just look away or ignore. The solution to this is simple, try to avoid investing money that you need in the short term in high-risk investments like stocks, crypto, etc. anything can happen in the short term. Anything can be good or bad. When you don't need the money in the next 3-5 years, it's a lot easier to focus on something else. A lot can change in that time, so do something else to take your mind off it.

5. The reason your investment is down could have NOTHING to do with your investment at all

It's possible it's not just your investment, it could be the entire market, and if that is the case, then it doesn't mean you made a wrong investment decision. It just means that there is a market-wide issue that would eventually pass and allow your investment to grow as it should. So wait.

Final Thoughts

You need to keep a calm disposition when investing in the high risk stuff like the stock market and cryptocurrency. If you’re easily shaken, it’ll be a tough time waiting out your investment.

Try to limit the amount of time you spend watching the stock. If it’s your job, then sure, watch it every second of the day. But if it’s a long-term investment, there’s no point looking into it every hour of the day.

The ebbs and flows of the market will impact the price. But not in the long term. Unless you’re a day trader, stop looking at your positions so often. It does nothing but scares you.

If a company is good, the stock will rise. Take a chill pill, drink water and let your investments work themselves out. If you can’t handle the pressure of waiting, maybe look for lower-risk investment options that are not as volatile.

The economy is a fickle menace in the short term. But in the long term, you can count on it. If you think your investment will turn out well, don’t spend time worrying about things that are out of your control.

Don't forget to sign up for the group discussion about the US stock market this Saturday. Here's the link to sign up here.