This article will discuss a number of topics including:
- How to get over losing money? What you can do if you have lost money?
- Why we often lose money without even realising it
- Why we are more likely to lose money during face-to-face interactions. What does Neville Chamberlain’s “peace in our time” speech, where he misread Hitler, have to do with losing money in business and investing?
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What can you do if you have lost money?
Below is a list of things you can do if you have lost money, and how you can avoid losing money in the future.
- Review why you lost money
The first step is to ask yourself a simple question; why did I lose money? Sounds obviously, but many people come to the wrong conclusions.
For example you hear people saying things like “I lost money during the recession and stock market plunge”.
Yet nobody lost money “due” to the market decline in 2008-2009. Stock markets only took 2-3 years to recover from that crisis and 5 years from dot.com in 1999-2000:
So if you lost money, it was either because you panic sold, had many individual stocks rather than holding the whole market or had another irresponsible investment.
The same trend can be found if we look at longer periods of time. Nobody who has held the S&P500 for decades, has ever lost money:
And yet many average investors either lose money, or get lower returns than the index, as the figures below suggest:
The same thing if you lost your house. You might have taken out too much credit to begin with.
Be wiling to take personal responsibility rather than just pointing the finger.
2. Don’t throw the baby out with the bathwater
Many people react in two extreme ways if they lose money:
- Either they try to make up for those losses quickly with get rich quick schemes, which by definition, come with unrealistic returns.
- Or they go to the other extreme, and just leave money in the bank, losing to inflation in the process.
A balance is needed between these two extreme views.
3. Define “losing money” more closely and you will be amazed
Last year I met an expat in Japan, who seemed hurt about the fact that he lost money in a stock, despite admitting that “I probably should have held onto it for longer”.
In the next sentence, he “boasted” about losing a large amount off money on a gamble related to sports!
I have seen this all the time – people process losses from gambling and overconsumption, differently to investing and business.
Likewise, people process “direct losses” different to indirect losses, even if the indirect losses are bigger.
What do I mean by that? I will give you a specific example – one involving my own personal situation.
I am currently considering a second residency scheme in a number of countries – I am currently comparing and contrasting numerous schemes.
Let’s just take the Malaysia scheme as one example of many I could use. In return for $70,000, I can live in Malaysia with 0% tax on overseas income if I apply for the scheme.
I also get about 4% from a local Ringit account (USD deposits aren’t allowed for the scheme).
So I am making money right? No, I am still losing money most likely, indirectly, even if I can make up for that loss with tax benefits.
Why? Let’s go back in time to illustrate my point, by imaging “David” that applied for the scheme in 2010.
2010 – 300,000 Malaysian Ringit (about $88,235 at the time with a 3.60 exchange rate in early 2009) with a return of 4% in a Ringit account = 444,073 Ringit in 2020.
2020 – 444,073 Ringit = $107,737.66 at the time of writing. That’s a return of 2% per year in USD terms – barely matching inflation or slightly below inflation.
More importantly, if David had put that same $88,235 into the US or other stock markets, it would now be worth close to $200,000!
So an indirect loss of $93,000! Don’t get me wrong, there are so many factors to look at in this example including
1). The future inflation rate.
2). Relative loss to markets.
3). Tax savings which can adjust for this indirect loss.
4). Markets have performed better than usual in the last 10 years.
5). We can’t predict how the stock markets or indeed Ringgit will perform in the next 10 years.
However, you get my point. People don’t process a 4% return in local currency and 2% in USD terms as a loss, despite the fact that the long-term average return of the US Stock Markets (the S&P500, Dow Jones and Nasdaq) has been about 10% per year.
More problematically, most people with 100,000 Euros or Pounds in their bank accounts don’t say “I am going to loss 2,000 this year due to inflation” . Rather they tend to say “I am only making 0.1% per year”.
Another example is consumption. A wealthier person who spends $100 in a bar is more likely to understand that they have actually spent $200-$300, if you adjust for how much that money could have been worth, had it been invested.
That doesn’t mean we should never spend money, it merely shows how we process “losses” isn’t always consistent.
4. Don’t lend to friends and family members
If you want to reduce your chances of losing money, don’t lend money to friends.
Want an incredible fact? The chances of a complete stranger giving you money back is 80%-90%, but the chances of a friend or family member giving you money back is lower.
Why? Probably the biggest reason isn’t intentional slyness but justifying actions.
We don’t know strangers by definition, so we can’t justify that “this person doesn’t need the money back” or “he was nasty to me when we were growing up”.
One of the best books I have read in recent times is from the acclaimed author Malcolm Gladwell:
In Talking to Strangers, Gladwell makes the point that we usually overestimate how much we can learn from face-to-face interactions.
The people who were right about Hitler, Gladwell remarks, never met him. That includes Winston Churchill and others, who focused on his words, actions and speeches.
In comparison, those that met him, often ignored his words and speeches, and trusted him, based on meeting him.
For example Neville Chamberlain hailed “peace in our time” after meeting Hitler – probably because he “liked him” in-person.
In business, the same rules often apply. To give you some examples;
- I have made more money on people hiring them remotely. I have lost more money on people I interview face-to-face.
- I have made more money dealing with providers remotely, as opposed to face-to-face. That includes recruiters and other professionals.
The reason I think is simple. When we know a person, or meet them in person, the decision we make is less based on emotion, and we consider the facts more carefully.
The billionaire and Shark Tank mogul Mark Cuban, has admitted that he doesn’t most of his business through cold email for this reason.
He has invested millions of money from such cold approaches from others. There is an obvious rationale for this.
He can review the information quickly and efficiently, without being blinded by “liking somebody”, or wasting time committing to meetings by car, plane or other forms of transport.
5. Switch off the media
Why does the media exist? Often it spreads fear. Fear sells more than optimism. “Whatever bleeds, leads”.
Therefore, pick up any newspaper, and it will be full of stories of murder, rape, scams and god knows what else.
That doesn’t mean these things don’t exit, but merely that people overestimate how common they are.
In the age of 24/7 a day social media and “outrage culture” this situation is only getting worse as time goes on.
Everybody seems scared and scandalised for a few minutes, only to move onto a new topic to worry bout a few days later.
The interesting thing is, if you ask people “do you think crime is going up or down locally” they will usually say it is going down or staying stagnant.
Ask them if crime is going up or down nationally or globally, and they will say it is going up – even though it has gone down in most countries in the last 30 years.
I often hear people say “I read about all these scams” and when I ask them “oh so I guess you or people you know have been scammed”, they often say “no no. I mean I have just heard stories”.
Ultimately, if I count on my hands the number of people who have been scammed, it is tiny and they have lost small sums.
In comparison, if I count on the other hand all the people I know who are losing thousands a year from relative losses, and it is the majority of people I know!
Don’t let the media scare you into leaving your money in the bank, “earning” less than 1% per year.
6. Make a distinction between volatility and stability
It is naturally to assume that the more volatile the asset, means the riskier it is.
In fact, that isn’t always the case. Stocks have always beaten bonds long-term, but they are more volatile.
The most volatile US Stock Market is the Nasdaq, but it has beaten the S&P500 and Dow Jones in the last 25 years (12% vs about 10% per year).
Often people lose money because they are so obsessed with not “seeing their money go down”, so they seek “guaranteed” products which usually have loads of hidden risks.
Despite their being many free advisory useful resources out there people still make avoidable mistakes with their choices.
7. Don’t put all your eggs in one basket
As the last section made clear, stock markets are a great long-term bet, but can go down hard over short periods of time, or even occasionally stay stagnant over a 10 year horizon.
Therefore, having bonds in your portfolio also makes sense. They pay less, but tend to rise in value, when markets fall.
This gives you an opportunity to profit from any market fluctuations.
8. Review what you have objectively.
Look at your existing investments, cash and other things which contribute towards your financial health.
Review them and be willing to take a short-term loss. Too many people have “loss aversion”
Loss aversion is when a loss is twice or even 10x as painful as a gain is profitable:
How does this manifest itself? An example is an investor with a $100,000 investment portfolio.
It is now worth $98,000 despite being taken out 10 years ago, and markets being up.
Instead of selling now, and taking the $2,000 loss, the person waits and sells 3 years later, when the account is valued at $105,000.
It feels more comfortable but if they would have invested it in a more productive portfolio, the value could now be $150,000 or more, given how markets are performing.
Taking that option, however, is more painful in the beginning, so many investors avoid it, and take a bigger loss, further down the road.
Far more people lose money due to “relatively missing out on opportunities” than through bad investments, scams and the like.
The media exists to sensationalise, which often means far more people lose out due to fear, than greed.
In particular, many people avoid investing money, and therefore lose money in the bank to inflation.
The ironic thing is more people have probably lost money in the world lending money to friends, than dealing with strangers, as per the Malcolm Gladwell book mentioned above.
Are you in danger of losing money in traditional expat investments? The article below discusses this very subject.
What can you do if you have a policy that has been underperforming for years?