You Need to Lose Money to Make Profits

Do you remember your first investment loss? What did it feel like? My first loss was a long time ago. I know so much now, but I don’t think I will ever forget the first time I lost money.

I wanted to invest some money I had saved up but knew nothing about investments. A friend hooked me up with her sister who was an insurance agent. She sold me a life insurance policy with a cash value that was a good "investment". The cash value was guaranteed by the insurance company. It sounded good to me and I signed up. I was a young single woman at the time with no kids. Years later when my rent went up unexpectedly, I went to draw on this cash value and couldn't. I studied up on what I had invested in and was furious that I was sold a policy that wasn’t suitable for me and wasn't really an investment. Lesson learned.

As my knowledge about personal finance grew, I ran into all sorts of people that had made investments and lost money in things that they didn't really understand or were not appropriate for them. I remember meeting a guy who told me he would never invest in mutual funds again. He had bought a fund and in six months, it went down in value so he sold it. He didn't understand that he could have held onto it. His loss was a paper loss, and it had the opportunity to go up again- if only he held on to it. Markets go up and they go down. If you understand how something works, and you know it is right for you, you need to be invested in it for the long term. What's long term? At least 5 years minimum.

Just like in life, there are no quick ways to get rich. The slow and steady growth of your money is a lot like that. There are lots of bumps in the road but you are still alive and working and investing more each year. The big difference is that when you experience a loss, you do not let it wash you away. You keep investing more and you learn from your past experiences. Those people who invested and lost money will invest again and over time their gains will outweigh their losses. Many will not even remember their losses because they understand the basics of compound interest and they learn to limit their risks through strategies like diversification.

Many people say they will never again invest after a loss. They will continually earn and spend with no possibilities of growth over time. They work, they earn, they save, and their savings doesn't even keep up with taxes and inflation so they are actually getting behind every year- now that's a guaranteed loss every single year of your life.

Learn from your losses but keep investing for growth. You can’t afford not to.

About the author

Fern Alix LaRocca CFP® EA

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