Have you ever had an old car or boat and you keep it going, somehow?
Well, obviously the way to keep it going is money, and more money. And as you put more in, how do you decide when enough is enough? How do you cut your losses, get rid of it and buy a new one?
This is what behavioral economists term the ‘sunk cost effect’ and I am sure every trader can relate this to an experience in their trading career.
Within stock investing and trading, the impact of such a situation is potentially going to be great, as a sunk cost effect trade is one where you can’t let go of it even though it’s not going to give a return on investment.
Whether you have a big or small holding, the issue is the temptation to hold on to the losing trade that you put so many hopes into, even if you have a trading plan that says to get out. The issue is the emotional attachment to all the time invested to identifying and researching the opportunity as well as the money invested.
At what point do you cut out? How do you leave it all behind?
Accept Your Losses And Move On
Well, the answer is pretty simplistic and obvious.
Accept the loss, take the setback, and move on. Not something human nature is too inclined to do but definitely something that an investor/trader has to adapt to.
Being wrong sometimes is natural, human even. For an investor/trader, it is a standard part of the markets as it is unrealistic to believe you can control them enough to win with every single trade, no matter how much of an expert you are.
It is the other side of the probability odds that you are relying on and that also dictates that you acknowledge you were wrong and get out gracefully. The biggest issue is that the cost of staying in can mount up without even noticing it, in part because the money committed to that losing trade can’t be used elsewhere in the meantime.
How to Accept Your Losses, Let Go, and Move On
So where do you start?
How do you let a bad trade go without any feeling of regret that can then affect your future investments and trades?
I was recently asked this by one of our Blueprint students, and here are a few pointers to help you out:
1. Have multiple positions
The easiest way is to have multiple positions on at any one time.
You see when you have all your eggs in the one basket, it’s extremely hard to separate your emotions because you’re then reliant on that one investment or trade to make all your profits, and when it doesn’t work out the way you expected, then you immediately fall into the disappointment trap.
Whereas if you had many positions on, who cares if 1-2 don’t work out when 8-9 of the others do.
This way you can calmly get in and get out of the investment without any emotional attachment at all.
➜ Related Post: Position Sizing: How I Sleep Like a Baby at Night with my Stock Portfolio Intact
2. Don’t have any expectations
Don’t have any expectations of how much profit that investment or trade will make.
Sometimes you’re lucky and it works out right away, other times it takes a few weeks.
Even if you give it your best research and you’re convinced that it’s going to be a big winner, things can still go wrong last minute with an unexpected piece of news.
So take profits when you can but accept losses quickly and move on.
3. Expect 1-2 out of 10 investments to not work out
Here I do want you to have expectations.
Because I want you to expect that 1-2 out of every 10 investments will not work out. That’s been based not only on our own experience but also from the experience of the 1000+ students we currently have.
Losses are just part of this investment game and you must accept this fact and move on.
If the position becomes a loss, know it was the 1-2 that was expected to be a loss, let it go and move on. Just say “Next!” and the next 8-9 will easily cover the small loss you have.
Givie yourself permission to be wrong, even embrace it as it is a mark of being a ‘real’ trader where you set outside the basic investor, safe ground into active trading and risk.
Summary
Losses will happen, errors will be made and decisions will appear to be hard to justify but that is the nature of the job. It is what you do about it all that is the mark of the seasoned versus novice trader.
Acknowledge when you are hanging on to a trade due to the sunk cost effect.
Recognise the opportunities you are missing out simply due to pride or annoyance at picking the wrong stock and let it go.
I hope the 3 key points covered above will help you become a more disciplined trader and investor that is able to buy and sell without regret and move on to the next thing.
If it has, make sure you share this post to help others.
Thanks!
Terry
