6 Steps to Recover from a Bad Investment

Investing can be rewarding, but it also comes with its fair share of risks. At times, even seasoned investors find themselves dealing with the reality of a bad investment. And for anyone, the aftermath of it can be disheartening—may it be caused by unforeseen market shifts, poor decision-making, or other external factors.

It’s never easy to admit that you made a bad investment. No one wants other people to know that they lost a lot of money or that they made the wrong choices. That’s why, in this latest article, we’ll talk about the 6 essential steps on how one can healthily recover from bad financial decisions.

Step #1: Keep the Faith in Yourself

Doubt and self-confidence can easily creep in when dealing with bad investments. It’s normal to feel bad after realizing you made a poor choice. It’s normal to get angry and blame yourself or other people. But the first step toward recovery is keeping faith in yourself.

Regardless of experience, investors encounter ups and downs. So it’s important to reflect on your previous successes. Keep in mind that what makes an investor successful is their ability to learn from previous choices.

While the outcome was potentially unfavorable, acknowledge the courage you had to take a measured risk. Use the experience to strengthen your resolve to make more informed decisions moving forward. Despite all the negative emotions you’re feeling, remember that as long as you’re alive, you’ll be able to recover.

Now that we’ve dealt with our emotions, let’s go to the practical side of things.

Step #2: Seek for a Refund

This step can be useful for you if you just started investing and wish to withdraw. When you realize that you made a mistake, one of the first things you should do is identify whether or not you can get your money back. Some investments can have a cancellation or refund period, so try to ask about it.

A good negotiating tactic is to directly inquire what the process for a refund would be. Instead of asking, “Can I back out and opt for a refund?”, you can say, “I want to refund. What are the steps to take?” The difference is that in the second one, you already assumed you'd get your money back instead of the first one where they could just simply say no to you.

Investments differ from one another, so there’s no 100% guarantee that you can get a refund. Some have a limited refund period, some may have penalties, and some have none at all. Regardless, try to seek a refund immediately to minimize your losses. But if you aren’t able to get any of your money back, it’s time to move on and identify the right direction to take, which should start with step 3.

Step #3: Be Wary of the Sunk-Cost Fallacy

The sunk cost fallacy is a psychological trap that can hinder your decision-making process. It happens when you continue to put more time, money, or effort into a failing venture just because you’ve already invested a lot. Recognizing this bias and overcoming it are necessary steps in recovering from a failed investment.

To understand this better, let’s say Sarah has made a non-refundable down payment of about S$24,000 to reserve and purchase a condo worth S$160,000. Now, for whatever reason, Sarah realizes that the condo was actually a bad decision. The first two options that come to anyone’s mind would be to (1) let go of the condo and waste the down payment, or (2) spend thousands of dollars to continue to pay for the condo and not waste the S$24,000.

What many people don’t realize is that regardless of what option Sarah chooses, she can never really recover the S$24,000 anymore. And in this scenario, the down payment is the sunk cost. Often than not, people have a hard time letting go, so they’ll prefer the option where they’ll just continue the investment, even if it seems not to be beneficial at all. The right way to think through the next step is to not factor in the S$24,000 down payment or the sunk cost anymore. With that said, let’s proceed to step 4.

Step #4: Consider the Opportunity Cost

This step is related to the sunk-cost fallacy, as opportunity cost refers to the potential benefits you could’ve gained by choosing a different course of action.

So using this in our condo sample earlier, we know that there are two options to take. But since the S$24,000 is already a sunk cost, it should not be factored in for the next step. Let’s focus on the thousands Sarah will pay if she chooses to get the condo. What are the other opportunities that Sarah might miss out on if she chooses to pay the rest of the S$160,000? These options can range from maybe investing in the stock market, buying a better suited property, or even travelling to a different country for a vacation. Choosing one option means forfeiting the others. And this is why we must consider the opportunity cost.

Now, through steps 3 and 4, the goal is for you to understand the bigger picture of how to choose the best way to recover from your bad investments. It’s understandable that it’s not easy to let go, but just because you have already invested a lot doesn't mean you should continue even if it turns out to be a bad decision. Remember to look forward and focus on your goals. Don’t let yourself miss out on better opportunities. Let’s go to step 5.

Step #5: Learn from Your Mistake

Every bad investment offers a valuable lesson, so don’t forget to reflect on this experience. Take the time to analyze what went wrong and pinpoint the possible causes of the outcome.

As a guide, you can use the following questions:

• Did I do proper research?
• Did my emotions play a role?
• Were there external factors at play?
• Did I overlook the risks?
• Did I stay informed?
• How can I improve going forward?

Honestly address these so you can gain a deeper understanding of how you make your investment decisions. Document what you’ve learned to create a reference for yourself to help you avoid similar pitfalls and adjust your approach to making investments in the future.

And last but not least…

Step #6: Be Grateful for the Lessons Learned

This is definitely easier said than done, but the last thing you can do is accept what’s already happened and be grateful for the things you’ve learned. Even if it’s challenging, use the setbacks as an opportunity to refine your approach and understanding. The important thing is that you now know how to move forward and make better decisions.

And that’s it! These are our steps on how to recover from a bad investment. Do these whenever you make a poor investment decision so you can recover faster and get back on track easier.

If you still find yourself uncertain about the best path forward, don’t hesitate to seek professional advice for clarity as they can offer tailored recommendations based on your unique situation. I offer investment advisory myself, so in case you don’t have one yet, you can book a call with me here.