Cost of a Total Loss Is More Than Money

If you have experienced a partial or full loss of capital, I’m sorry.  But I’ve been there and I’m here to talk about more than just the financial aspect of capital losses.  I’m here to discuss the personal, interpersonal, and financial aspects - and how I was able to put that behind me.

Defining Loss

When we think of investment losses, they are typically presented in the abstract – the red numbers on a spreadsheet, a line item on a corporation’s quarterly report, or maybe the normal downside fluctuations of your brokerage account balance.

These types of losses while unpleasant are typically not catastrophic.  

Now let’s talk about the complete loss of capital.  The unrecoverable zero sum of hard-earned money.  Money that was earned, saved, and placed with deep faith into the hands of someone you trusted.  Money that was expected to work hard and grow for future you.  Gone. Irrecoverable. Zero. Dead. So sorry.

This type of loss many of us are unfamiliar with and it carries a very heavy burden similar to the untimely death of a person or pet.  It’s permanent and unexpected.  Sad, confusing, rage-provoking.

Your friends, family, and perhaps you tell yourself:

“You knew the risks.”

“It’s just money.”

“You’re already rich, what are you so worried about?”

Your logical, rational brain knows these things to be true, but loss is not rational – it’s emotional. And emotions can fester.

“How could I have been so stupid?”

“Why did I do that?”

“How am I going to tell my spouse?”

The Three Parts of Loss

Part 1: Personal

Let’s talk about our ego – one’s sense of self. Sustaining a capital loss is a humbling experience.  It proves that you were wrong. A belief, a conclusion, a plan.  It didn’t work.  Whatever you had in mind, most definitely did not pan out. This can bring up many very uncomfortable questions:

“Where did I go wrong?”

“Am I really that inept?”

“Can I trust myself?”

Part 2: Interpersonal

Money is typically a shared resource – retirement, funding a child’s education, buying that trip or home. So, when the money meant to fund those dreams and goals is lost, the loss is not limited to oneself, but can affect many others around us.  Money in the best of times is a difficult topic; but a complete loss of capital – can there be anything worse to discuss with those who share it? This can result in:

·       Conflict

·       Hiding, limiting, or providing inaccurate information

·       Withdrawal

Part 3: Financial

Financial plans are like birth plans: they provide a sense of certainty about an uncontrollable future.  We only see the bright side and minimize the downside.  But sooner or later the market changes and the downside arrives - indifferent to whatever you had planned. I am not suggesting you go without a financial plan, but what is put on paper and what transpires in reality can bear little resemblance to one another.  The complete loss of capital is an extreme deviation from plan.  Depending on one’s financial situation, this can result in:

·       Delayed retirement

·       Diminished earnings

·       Eroded net worth

Moving On

Loss, like grief, has no one way to work through.  The process described here is what I did.  What works for you may include some, all, or none of this. It was long, hard, and deeply unpleasant work.  But sometimes things have to get worse before they get better.

Step 1: Face Reality

Go ahead – size it ALL up.  All three parts: the personal, interpersonal, and financial.  Look at yourself and all the messiness of your emotions.  The same with your relationships.  Then look at your finances.  Open the reports.  Look at the numbers.  Looking away won’t make it go away, so steel your nerve and give reality a long, hard look.

Step 2: Practice Radical Responsibility

Taking full responsibility is really, really hard.  It takes practice and courage.  But, owning that every outcome is the direct result of your action is the only way to regain control of yourself and your life - and learn to make better decisions.  The alternative is denial or blame-shifting – both of which put you in the victim position and will never give you the power to make better future decisions.

For example, many 2020 – 2022 vintage deals have been stressed and failed due to interest rate increases.

Radical Responsibility:

“I didn’t understand interest rate risk and how it could lead to a complete loss. In the future, I will know to look for this type of risk.”  - or – “This is an investment type that I don’t have the capacity to use effectively.  I will use other investment vehicles better suited to me.”

Blame-shifting:

“Real estate investing is a scam and the Fed has the power to destroy my investments. I can’t trust real estate as an investment.”

Step 3: Forgive Yourself

Today you is not yesterday you.  Neither is the world.  The person and world that existed when you made the bad investment no longer exists.  If you had the knowledge and tools you have today, yesterday you would have probably made a different choice.  Feeling ashamed of or embarrassed by your past self may feel uncomfortable, but it’s a sign of growth. Have the grace to forgive yourself.

Step 4: Make a New Plan

Now that you’ve gotten a firm grasp on reality and accepted responsibility for yourself, it’s time to make a new plan.  Look at all three parts: the personal, interpersonal, and financial.  Where do things stand now compared to where you want to go? What is standing between you and those goals?  Again, this may take a lot of time and introspection, but you’re building the foundation for the next phase of your life.  

Conclusion

Capital losses are permanent.  The resulting fallout need not be.  When we do not succeed, we can choose to fail and stagnate or we can choose to learn and grow.  The choice is yours.