From buying bonds from water treatment firm Hyflux to purchasing Bitcoin in early 2018, investors sometimes make mistakes.

Many of them worry that the impact will last or that they won’t recover from their error.

Learning from losses, though, can position investors well for the future. 

In an era of non-stop Tweets and Facebook posts as well as sharing of information on WhatsApp, it is remarkable that few people have admitted to losing money on their investments or making a mistake.

Even well-known investment professionals usually talk about their successes and rarely admit mistakes.

Losses do happen, though.

Investors in Hyflux who bought some of the S$500 million worth of “perpetual” securities issued in 2016, for example, found out on 22 May last year that the company had applied to the High Court to begin a reorganisation, making their investments potentially worthless.

Individuals who bought digital currency Bitcoin in December 2017, when the price was close to US$20,000 (around S$27,600) and forecasters expected it to reach US$100,000, were far poorer after it plummeted to US$3,756 a year later. 

And investors who purchased shares in property and hotel conglomerate City Developments at the start of last year lost 35 per cent by the end of the year, while investors who bought into palm oil company Golden Agri-Resources lost 33 per cent.   

Even renowned investors such as Warren Buffet makes mistakes.

After he invested in food producer Kraft Heinz, for example, the price dropped by more than 50 per cent and his company lost more than US$4 billion. “We overpaid for Kraft,” Buffet told CNBC, in an understatement.

There are plenty more examples as well. While the mistakes may be painful and can negatively affect anything from children’s education to retirement, it is more important to learn from them than to feel miserable.

“What may separate the good investors from the ones who are less successful,” investment advisory firm Motley Fool observed, “is being able to learn from their mistakes. Continuing to invest even after having made mistakes could help an investor to more accurately identify their risk tolerance, as well as discover an investment style that works for them.”

THREE-STEP PROCESS

While it can be easy to focus on what went wrong after the value of an investment plummets and use that as an excuse to put your money into an ultra-safe savings account, that decision could be one of the worst decisions you could make. Whereas returns of less than 0.1 per cent on savings accounts won’t even allow you to keep up with inflation, investing in a diversified portfolio can earn you 5 per cent or more over the longer term.

So, what do you need to do after a loss? Taking the following three steps can be beneficial.

1. Analyse your loss

Look at the investment that has lost money and decide whether to keep it or sell it.

Set your emotions aside, analyse the fundamentals of the investment, read reports from analysts and ask yourself whether you would still invest if you didn’t own it today.
Then, decide how to proceed.

Many times, it’s better to sell right away.

Selling before it drops further, despite an emotional inclination to hold on in case it rallies back, can avoid further losses.

Yet holding on can sometimes be a good strategy. Stansberry Pacific Research writer Whitney Tilson bought shares in Sodastream, whose machines turn tap water into sparking water, in 2014. “It turns out that I was much too early. The stock kept drifting lower for nearly two years! I was able to set aside my emotions and focus my analysis on the fundamentals, which remained strong. By the time I closed my funds in late 2017, it was up five times.” 

Your analysis should show you which path to take.

2. View the loss as a chance to learn

Review your investing process to see what you can improve. Figure out whether your loss was caused by wrong assumptions about the market or incomplete information, for example, and decide what to do differently in the future.

3. Review your investment portfolio

Examine your portfolio and decide whether to make any changes.

You may review your exchange-traded funds (ETFs), shares, bonds, property or other investments to see whether you have too-risky assets that you should sell.

You may also make sure that the portfolio is well-diversified, with at least 20-30 ETFs, shares and bonds — to reduce the impact of a loss from any one investment in your portfolio.

Ensuring that your portfolio has an appropriate mix of stocks, bonds and other investments for your investment time horizon and risk tolerance can position you well.

If your portfolio does not match your profile or is too narrowly concentrated, you may review your holdings and use your new strategy to reallocate into new investments.

It may also be helpful to put together a checklist that reminds you of the key points to consider before selecting an investment. 

While learning from a mistake is easier said than done, it is essential to detach yourself emotionally from your mistake and use it to learn.

Once you have decided what to do with your loss-making investment and refined your broader approach to investing, you may use your new strategy to position yourself better for gains in the future.