Lost Money in the Markets? It's a Good Learning Experience (and Can Make You a Better Investor)

There's something unique about the achy feeling in the pit of your stomach when you lose money in the markets. Whether you slipped and forgot all about technical analysis or became a victim of the tail-end of the meme craze, losing a bunch of money can make you feel like hiding under the bed. (Consider the NPR story about the rookie day trader who lost $127,000 and destroyed his account in the process.)

Now, you don't have to lose $127,000 to feel icky about losing money. 

Did you ever think about the fact that losing money in the markets may actually be a good thing? Like failing fast when you decided to start that dropshipping company, it offers a great learning experience and it can make you a better investor or trader.

Thomas Edison's lightbulb quote comes to mind: "I haven't failed — I've just found 10,000 ways that won't work."

Despite the fact that it's super painful to lose thousands of dollars (and of course, it's never good to lose your livelihood or your home), let's take a look at the silver linings — the reasons why it's good to lose money in the stock market.

Reason 1: You realize that careful learning over time has its merits.

Not really a news flash: Instant gratification rages rampant. And you're almost powerless against it, bombarded with news, social media and up-to-the minute information. 

Taking time to do research instead of becoming a slave to technology may help you realize the value of waiting. Careful research gives you time to master difficult concepts. You may never get out of the losing money rut you're in if you don't invest time and patience to try something new or change tactics. 

It took Edison three years, from 1878 to 1880, and 3,000 different theories to develop an efficient incandescent lamp.

Reason 2: Diversification might become your best friend.

Diversification means that instead of concentrating your energy and money on a single company or investment, you invest in a diverse portfolio of stocks, bonds and mutual funds. 

It's one of the best ways to protect your retirement accounts from potential losses. You can also add in ultra-safe investments like money market accounts and certificates of deposit (CDs) so you keep your money safe from large downturns.

Does this mean that you lean away from high returns and stick to investments that won't net you much? 

Not at all. It simply means that you spread your money out and that you give yourself ways to pocket money in the event that you do have an "oopsie" when day trading.  

Reason 3: You can write it off.

When you lose money in the markets, all is not lost. The IRS allows you to write off a maximum amount of $3,000 for capital losses in a given year. (Note that those married filing separately can only write off $1,500.)

Does that seem like a drop in the bucket? Well, if you've lost a lot of money in the stock market, it's understandable how you could feel that way. However, if your losses exceed this amount, you can carry the remainder over to future years and write them off on future taxes. 

Reason 4: You learn to control your emotions.

Ever felt fear of missing out (FOMO)? How about greed? 

C'mon, admit it. Behavioral finance tells us that investors make poor decisions related to fear and greed all the time. Pinpointing the reasons you're having trouble in the markets can help you master your emotions.

For example, let's say you follow chat groups for day traders. You watch the news and hear that other investors and traders have been shorting a particular stock. Fearful of missing out, you do the same, and you know what happens then. However, when you let the group guide your choices, you skip out on making your own decisions.

Remember the dot com bubble? It's a great example of investors' inability to control their emotions. In the 90s and early 2000s, public internet companies (which were not generating any revenues) were highly overvalued. Afraid of missing out, investors invested in them anyway and lost big bucks.

Reason 5: You remember the feeling of losing money.

One of the ways to become a better investor or trader involves remembering the feeling of losing money in the markets. After that, you may do everything in your power to avoid experiencing it again.

You may vow to understand what went wrong and develop strategies for prevention. You might even prefer to put aside time and mental energy to do so! You may seek to understand which seemingly irrelevant decisions actually did contribute to your loss of money. In short, you do everything you can to avoid it in the future.

Reason 6: You don't risk more than you can afford to lose.

And there's the golden rule of investing: You don't risk more money than you can afford to lose. 

It's a valuable lesson, and perhaps the most important lesson in protecting your assets from risk and volatility. 

In order to pinpoint money you can afford to lose, build up everything else first — your savings for emergencies and also other general expenses to cover you from three to six months. If you have a more unstable job, you may want a cushion that lasts a year!

You can minimize the risks to your portfolio by building up your savings, insurance, retirement accounts and real estate holdings. 

Losing Money Can Actually Be a Good Thing

Just like many other things you try to get better at — your job, learning to cook, even learning to do things like water ski or play the piano — experience and repetition give you the most valuable help in getting better at them.

When you fail, you learn, and losing a lot of money can be a great thing, even if it doesn't feel that great at the time it happens.