Psychological Coping Strategies For Handling Losses

By Brian Bloch AAA

Psychologists have written extensively on the defense mechanisms that people use to eradicate something unpleasant or detrimental from perceived reality. A disastrous investment is a perfect example of something that literally anyone would like to reverse or undo.

When the losses are there, unfortunately, the clock cannot be turned back. Unless damages can be claimed from the seller, however, one has to somehow live with the losses. This is a better solution than throwing oneself off a tall building or terminating the seller with a sniper rifle from the same location. Stalking, harassment and libel are also highly ill-advised, but there are enough cases of this too. It is also better to manage the process psychologically than to try and win back the losses through other extremely risky investments.

SEE: The Importance Of Trading Psychology And Discipline

The Essence of Coping
Assuming that you have no legitimate claim against the seller, or cannot afford to go this route, it is necessary to come to terms with the situation. Of course, if the losses are so dramatic that you literally do not have a roof over your head or food on the table, coping is a dire financial struggle. We cannot deal with this scenario here. There are, thus, better and worse coping strategies, some of which we will consider below.

Sound Coping Strategies
One meaningful way of coping is simply to learn from one's errors and try to recoup the losses over time by investing well and prudently in the future. This is no quick fix or a sure thing, but it certainly makes sense to try. If you took excessive risks or trusted the wrong people or were just plain unlucky, you can be more careful and diversify your portfolio more in the future. Even if it takes years, you may well find that you do get some, or all, of it back, and it's comforting to think that this might happen.

You can try to save money by spending less. Provided you cut down on things that you do not really need, this is also a viable method. Drinking and smoking less, buying a cheaper car or keeping the old one longer and taking fewer lavish holidays, also add up to big savings in the long run. Don't ruin your life, however, by overdoing it.

Intellectualization is also not a bad option. Just being philosophical (sensibly and realistically) can work wonders. Some investments simply do go wrong; there are incompetent, unethical and dishonest people out there in the industry and anyone can be a victim. This is life and what doesn't kill you can make you stronger. There is a lot of truth in such thinking and it can help.

SEE: Be Risk Diverse, Not Risk Averse

Dysfunctional Coping Strategies
Suppression is an essentially negative strategy. Trying never to think about the losses is difficult and can be dangerous. Those thoughts can come back and haunt you anytime and may come out in other ways. Also, suppression creates a complicated inner conflict, which is not good for you or those you deal with. Financial problems and loss-induced distress can easily turn into marital or career-related problems or stress. Aggression and related behaviors are also not the way to cope. Taking out your frustrations on your family, colleagues or friends is fundamentally unfair and wrong. It does indeed happen, however. If someone else really is to blame for the financial disaster, then sue the real perpetrator.

Projection is a surprisingly common, but intrinsically dysfunctional, mode of behavior. People project or transfer their behavior onto others. For example, an excessively risk-loving or reckless husband not uncommonly accuses his truly mild-mannered wife of precisely his own bad behavior. In the financial context, the man may have gotten carried away in the property or dotcom boom and projects this onto his spouse: "you wanted a new car and a fancy lifestyle …" Even if the wife did want a new car, this does not mean that she wanted to take a major punt in the market.

Denial and self-delusion are, accordingly, particularly bad in the investment context. This approach also leads people to cling to failed investments in the vain hope that "they will go up again." If you bought a dud, it is almost always best to get rid of it and put whatever money is left into something safer and sounder. In short, cut your losses and move on.

Between the Two Extremes
People often find comfort in writing about their experiences. You may even really get the losses back if you can produce a bestseller; but beware of "revenge sites" on the Internet. A sensibly-formulated site that does not break any laws may indeed help you to cope, but caution is required.

Rationalization is useful, but only if it is realistic. It is important to understand what you and others did and why. For instance, were you tempted by the lure of big money, or were you the victim of a mis-selling? Were false promises made? Knowing what really happened in the past is the best way to move on to a better future. But when rationalization is really self-delusion and entails blaming others for your own mistakes, or not facing reality, the process is negative.

SEE: Understanding Investor Behavior

Therapy and Counseling
In the event of particularly severe losses, and even possibly with those that do not threaten one's financial survival, there are cases in which people cannot cope mentally. They suffer from depression and even despair, and they may resort to those negative coping strategies discussed above. In such instances, professional help is required. Going it alone does not always work and it is important to accept such a reality if it prevails. Psychologists and therapists of various kinds can help you apply sound strategies and come to terms with what has happened. Medication may also be worth considering, at least temporarily.

Of course, in terms of getting your money well-invested and managed in the future, independent financial advisors with good track records can be just what you need; this also helps psychologically. Indeed, the mixture of sound psychology and money management is what matters in the end.

The Bottom Line
Almost all of us would love to turn the clock back and eradicate financial mistakes and disasters from our lives. While changing the past is impossible, one can change how one views it and reacts to it. This may enable you recoup the actual financial losses, or at least recoup your peace of mind. There are both sound and unsound coping strategies, however. Make sure that you use the good ones that will help you and not harm other people.

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