I used to panic every time the market dropped, but learning a key investing concept erased my anxiety
- After paying off $81,000 in student loans, I was wary of taking any risks with my money, including investing. Every drop in the market made me nervous.
- But when I learned the concept of realized vs. unrealized losses, my perspective changed completely.
- Now, I know that with a long-term, buy-and-hold strategy, I can wait out any dips in the market and see gains in my portfolio.
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If there's one truth about investing it's that there will always be some level of risk. A lot of experts talk about knowing your "risk tolerance" when investing and creating a portfolio that works for you. Even so, we are emotional creatures, and it's easy to panic when there are huge shifts or drops in the market.
After the difficult and trying experience of paying off $81,000 in student loans, I was naturally a bit nervous about investing. When you're in so much debt, being net worth zero seems like a positive. So it made me nervous to part with the hard-earned money that was finally mine.
But I knew that investing was a way to build wealth in the long-term and beat the cost of inflation. And over time, there's one thing that helped me put things in perspective and reduce my anxiety.
What changed when I learned about realized vs. unrealized losses
When you hear stories about people "losing everything in the market" or saying they've "lost so much money," it's understandable to be a little wary. I used to hear these stories and I would feel that pain and anxiety, which would make me question if I was doing the right thing with my investments.
It wasn't until I understood the concept of realized versus unrealized losses that I was able to feel better about my strategy. A realized loss is when assets are sold for less than what the purchaser paid. The actual loss only occurs at the point of sale.
In other words, you don't really lose money when the market is down unless you actually sell your investments at a lower price. When you hold onto your investments — even at the low points — that is an unrealized loss, meaning that it's just a loss on paper but not a firm loss. By holding onto your investments through the low times, you wait for the market to recover.
I learned this lesson by reading more about investing on personal finance sites as well as listening to financial professionals explaining why you shouldn't freak out when the market dips. Focusing on gaining knowledge of how things really work from trusted sites and professionals helped me keep my emotions about investing in check and focus on the long-term goal.
My investing strategy
There are many types of investors and everyone has their own strategy. I have a buy-and-hold strategy when it comes to my investments.
"Buy and hold" refers to purchasing investments and holding onto them for many years, regardless of what is happening in the market. So if the market is tanking, buy-and-hold investors keep cool and don't do anything. They don't react.
I've taken my buy-and-hold strategy from experts like Warren Buffett, and I'm clear on what I'm using that money for. My investments are my nest egg for the future. I don't anticipate using those funds for at least three decades.
This strategy helps me focus on the future and my goals and not get flustered or panicked with day-to-day movements in the market. It takes a bit of practice to stay calm and not get sucked into the fear and anxiety when the market is volatile.
Part of this practice for me is not looking at my investments when the markets are going haywire. I don't need to obsess over my money and work myself up when I'm focused on the future.
Understanding that a dip in value in my account isn't permanent — and is only a loss if I actually do something and sell — keeps me steady. If there's a drop, it's simply an unrealized loss, but there's still an opportunity for it to go up, especially with so much time ahead.
What goes up must come down
If there's one adage that sums up investing, it's "what goes up must come down." Understanding that this is a natural and inevitable part of investing can help give you perspective.
History shows us that it's possible for the stock market to recover in several years; it took a little over four years for things to recover after the Great Recession of 2008. So if you're investing for your future and have many years ahead of you, adopt a buy-and-hold strategy — there's still plenty of time for things to recover.
Understanding this and letting things be as they are helps lessen my anxiety around investing and keeps me focused on the long-term. Knowing the difference between realized and unrealized losses has been a gamechanger in the way I view investing and the way I feel about it.
Now, I focus on consistency and the future and don't get worked up when the market is on the decline. I know that by giving my investments time to grow, things can recover if I stay the course.
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