What To Do After You Make A Bad Investment

Have you ever made an investment only to realize shortly thereafter that you made a huge error? Before you wrote the check you were sure you were making a smart investment but once the ink was dry, the fog cleared.  That’s when the pain hits.

Some folks never forgive themselves (let alone forget the mistake). And some people feel so badly about what they’ve done that they never go near investments again. Others try with all their might to make up for the misstep and just repeat the same mistake over and over again.  Both these reactions are understandable but can cost you big time when it comes to your net worth.

If you really want to prevent future train wrecks and make up for past errors, dissect the experience, isolate the mistake, create a plan on how to avoid that same error in the future, and then forgive yourself.   Let’s break this down.

What actually happened?

Just because an investment didn’t work out it doesn’t mean you did anything wrong.  Sometimes things don’t work out.  And sometimes mistakes work out to be blessings in disguise.  But it still pays to ask a few questions:

• Why did you make this investment?
• Were your expectations reasonable?
• Based on what?
• Did you make the investment purely based on another person’s recommendation or reputation or did you take a good look under the hood?
• Did you understand the risks before going ahead?
• What went wrong?
• In retrospect, was this negative outcome inevitable or forseeable?
• If you could do it all over again, what other questions would you have asked or what would you have paid more attention to?

Once you ask yourself these questions, you’ll have a sense of whether or not this investment was a dumb move or something that just happened to work out badly.

Was the investment consistent with your long-term plan/goals?

Sometimes an opportunity comes along that looks so juicy you just can’t resist.  I get it.  I’ve been there.  But this is exactly the time to slow down.  If you developed your own financial plan you already know what you need to do and how you need to do it.  Usually that involves long-term investments and avoiding undue risk.  Was this investment a solid long term move or was it more speculative?  There is nothing wrong with taking a little money and speculating once in awhile.  But you should never speculate with your serious money.

Did you convince yourself that this investment was less speculative than it really was?  The best way to avoid doing that in the future is to have an accountability partner and run these ideas by that person before you do it.

A person I knew put 80% of her retirement money into one stock because she met the CEO and was convinced the company was going to go through the roof.   As bad as that move was, what makes it worse is that she didn’t have to do it.  She was on track to reach her goals within her targeted time-frame by using lower risk, diversified funds.  Sadly, her stock play failed and she’s going to have work an extra 10 years because of it.  That’s depressing.

Everyone makes mistakes.  As I said, sometimes things just don’t work out.   But you’ll benefit by looking at what went wrong so you can learn from the error.  After you determined what caused the bad result, ask yourself if you had any business making the investment in the first place.  You do that by re-examining your long-term goals and financial plan.  Your plan will tell you what type of investments you need to make.  Did that bad investment fit your plan or was it too risky from the get-go?

What’s the worst investment you ever made?  What did it happen?  What did you learn from it?