The Fallacy of “Avoiding Losses”

For most investors, the pain you feel from losses is greater than the joy you feel from gains in your investment portfolio. Think about it. If you’ve been investing for decades, what are you likely to never forget – years like 2016 where you made a lot of money in the market, or the 2008 financial crisis when stocks cratered and you witnessed your retirement accounts go up in smoke?

We all lament bad years in the stock market. It’s no fun. So, can you avoid those bad years and the losses that come with them? Yes, you can. But I don’t think you’re going to appreciate the outcome.

The only surefire way to avoid losses is to not invest in the market at all. For most, that’s simply not an option.

Stocks are one of the only investments on the planet to consistently provide a positive return, when adjusted for inflation. Cash is worse than zero (after inflation you’re losing money), and bonds aren’t even in the ballpark of long-term equity returns – especially in this environment.

The fact is you need some level of stocks in your portfolio to meet most financial planning and retirement goals. The risk of loss that comes with investing in stocks is the very reason that they are a superior investment to any other asset on the planet. You cannot separate the risk/reward relationship – it’s like the law of gravity.

The year 2020 was a dumpster fire that nobody saw coming. It was completely unpredictable – global pandemic, nationwide riots, civil unrest, election chaos, etc. We saw the stock market crash followed by the sharpest economic decline since the Great Depression. Who could have possibly been bullish on stocks? And yet, here we are. In the midst of a raging bull market responsible for the swiftest recovery in history. Those that cashed out missed a historical rocket ship ride up.

You know what 2020 has in common with every year before it? It was completely unpredictable. Every year is unpredictable, without fail. And still, there’s never a shortage of financial “experts” chomping at the bit to tell us what will surely happen this year. Utter nonsense.

I do understand the psychology behind wanting to “take some chips off the table.” It’s the way we are wired. Much of investing is counterintuitive, but we have to fight the urge to give into that part of our brain that says, “just get out now while things are bad, and get back in when things calm down.” At the time you make the decision to get out it will bring you peace of mind. But you’ve traded one anxiety for another. Because eventually you’ll have to decide when to get back in at the perfect time.

You’ll watch the market daily for clues as to when the bottom has hit or when the recovery will begin. And there will always be those nagging suspicions, like maybe this isn’t the real recovery but a “dead cat bounce.” You’ll have friends encouraging you to stay out or get back in and the cycle will never end.

It’s not worth it. Just accept the inevitable ups and downs of the market and remember that losses are always temporary. The long-term gains you’ll make in stocks will more than make up for the temporary losses you have to endure from time-to-time.

Let me leave you with this visual. The stock market has endured countless obstacles through the years – financial crises, wars, geo-political events, pandemics, etc. This will always be the case. You will be rewarded for having the discipline to stick it out no matter the situation.