So you’ve lost money on the stock market…

There is nothing worse than watching the value of your stocks and shares investments tip into the red. But in the world of stocks and shares investing, this is not uncommon.

Just about every investor will lose money on the stock market at some point. It might be tempting to take all the money back out again, stuff it under the mattress, and swear off investing for good. Thankfully there’s hope that doesn’t involve dustmites.

The key to being a successful investor is being able to ride out periods of volatility. One of the core rules of stock market investing is that over the longer term, the highs and lows tend to balance out to deliver positive returns.

For example, between 27 June 1997 and 21 June 2022, the value of the FTSE All-Share rose by a whopping 79.79%, even though this 25-year period saw multiple market crashes and several years of negative annual returns. If you had invested £1,000 in the FTSE All-Share on 27 June 1997, you would have lost money in 2003, and again in 2008 and 2009. But if you had left your money in place even while your account was in the red, by 2022 you would be 79.79% richer.

The single most important thing to remember about a portfolio losing value is that you haven’t realised any monetary losses until you’ve sold the share. Until money changes hands, both your profits and losses are on paper only.

Therefore, the key to losing money on the stock market is to not panic. The rise and fall of markets is a completely normal (albeit frustrating) part of investing. The worst thing you can do at this point is to withdraw your money completely, as this will effectively mean accepting your loss. Instead, follow these steps to weather any portfolio volatility.

Just don’t look at it

If you see your stock market investments as a long-term play, there is no point in worrying about short term volatility. Leave your money in place and try to avoid micromanaging your portfolio. Trust in your investment decisions and don’t torture yourself by only checking your money during challenging economic times.

Take a historical approach

If you're really concerned about mounting losses, it may help to look at the history of the stock market’s performance. While past performance is no indicator of future returns, it can be really helpful to see how previous market dips have played out. This is especially true when you hold broad-market index-tracking investments. Even after infamous stock market crashes, the market has always bounced back – it's just a matter of time.

Remember, markets are funded by investors just like you. When losses start to appear, many of these investors will become understandably spooked and will pull their own money, which causes even more losses on the market. As economic conditions pick up again, those same investors will put their money back in, hoping to take advantage of any upswing.

Diversify

Instead of panicking that your portfolio has lost value, you could take this opportunity to reassess your portfolio and perhaps add more diversification. Perhaps you're over-exposed to equities, and therefore more vulnerable to stock market movements. This could be a good time to consider alternatives to equities, such as bonds, cash holdings or direct investments in assets such as property.

Or you may realise that too much of your money has been invested in a particular sector, which is causing a drag on your whole portfolio. If this is the case, review your investment split and rebalance your portfolio if need be.

Invest!

Experienced investors view stock market dips as an opportunity buy stocks more cheaply and expand their portfolio. If your investments have lost value due to macro-economic conditions (for example, a global pandemic, or the war in Ukraine), then you know that most investors will be seeing similar issues within their portfolio. While stock values are low, there is an opportunity to add to your existing portfolio or even pick up a bargain by buying into new stocks and shares.

Move your exit point

For some investors, a poorly-timed stock market crash can wreak havoc with their retirement plans. If you have spent 20 years investing in the stock market, only to see values drop at the very same time that you planned to withdraw it, you may want to reconsider your withdrawal date to maximise your gains.

If you have built up a stocks and shares portfolio worth £250,000 but the stock market loses 10% of its value, your portfolio will suddenly be worth just £225,000. However, if you can wait it out for a year or more while economic conditions improve, and your £225,000 could tick back up to £250,000 again. It’s just a matter of timing.

Know when it’s truly over

Stock markets usually go back up to previous levels and beyond after a crash, but this is not always true for individual stocks. If you're invested in a single company whose share price dropped because of issues unrelated to broader market movements, you might have a dog in your portfolio. The temptation is to keep holding on to a share that lost a lot of value in the hopes that it might recover to previous levels. While that might happen, the emotional anguish of looking at a losing investment every time you log into your portfolio might not be worth it. If it’s becoming clear that the stock will never recover, it might be time to cut your losses.