What to Do When You’ve Made a (Big) Bad Investment

The views and opinions expressed in this article are those of the author only and are not endorsed by Credit.com.

Most people are naturally risk-averse. They stay away from cliffs, steer clear of extreme sports, and sidle away from confrontations that might go awry. Given the immense importance of financial security, however, they can often be convinced to invest their money — though only in ways that are seen as fairly secure. Savings accounts offer modest returns, but they’re reliable.

Some, though, are decidedly more adventurous. They live more chaotic lives, try exotic foods, travel widely, and make daring investments. This often works to their advantage. Among them you’ll find those who’ve profited hugely from the cryptocurrency boom, for instance — but you’ll also encounter those unlucky individuals who bet it all on Bitcoin right before a crash.

If you’re someone who’s willing to take informed risks, you should be able to come out ahead on average, but bad investments will surely find you. What should you do if you proceed with a big investment and it completely turns against you? That’s what we’re going to consider in this post.

Accept Your Mistake to Prevent Further Sunk Cost

This has to be the first step in this process because it’s one that some people never take. Financial gambles can turn on a dime, and this lack of absolute certainty can lead some to view every investment as redeemable given enough time, preventing them from conceding defeat.

Let’s consider an example. An ecommerce merchant might stock up on a product they expect to skyrocket in popularity, only to see it become a dud due to a key design flaw and start to slump in value. With every reason to expect it to become all but worthless in a matter of months (or even weeks), the rational move would be to sell everything at a big loss simply to recoup some of the investment — but the merchant might instead choose to buy more stock, denying their mistake and choosing to view the value drop as a temporary blip before a huge resurgence.

This ties into the sunk cost fallacy of furthering an investment because you’ve already put so much into it. If you’ve made a bad investment, get out of it to whatever extent you can. Accept the damage so you can start to move on. You won’t be able to move on with your life while you’re still holding on to hope that it will magically turn around.

Focus on Protecting (or Rebuilding) Your Credit Score

Investments don’t necessarily affect your credit score. Brokers don’t need to check your credit score for you to start investing, nor will those accounts show up on your report. However it should still be an important part of your financial health. That’s because the amount you’ll be saving on high interest costs opens up more investing opportunities.

Even if your investments fail to hit your credit score, though, you should still make a concerted effort to nurture it. Why? Because coming back from a bad investment often calls for financial support, as you may need a loan (or loans) to enable your follow-up ventures–and you need to have a strong case to get people behind you. If you’re struggling with debt, it might be best for you to pay those down before getting started with investing.

Start by finding out your credit score, then consider your options for working on it. Whatever plan you come up with needs to function in the long term, so don’t expect to make some credit concessions for a month before dropping the effort. This is something that will matter for the rest of your life, so it needs to be taken seriously.

Look for Downsizing Opportunities (e.g. Your Mortgage)

If your finances are hugely strained due to your bad investment, you should look for some leeway elsewhere. What changes can you make to give yourself some slack? There will surely be opportunities for downsizing if you have the resolve to accept them, so review all your assets and outgoings and think carefully about what the right move may be.

This will obviously depend on the scale of your error. If your investment has devastated your finances, start with your biggest financial commitments–and if you have a mortgage, that will surely be top of the pile. It might sound like a complicated matter, but you don’t need to do much legwork.

Next up might be your vehicle. If you own an expensive car, consider selling it and buying something more economical. Spending a lot on meals each month? Come up with a budget to reduce your reliance on expensive take-out feasts. You should even think about the subscription services you pay for, because you may be putting money towards things you don’t use: cutting unused subscriptions can result in significant savings.

It isn’t generally enjoyable to downsize, and there’s a good chance that you’ll feel like a huge failure. That’s unfortunate, but it doesn’t make the process any less vital. The more you can do to protect your finances today, the stronger your finances will be in a decade. Consult with a  professional mortgage broker to determine what options you have for refinancing your property and at what rates.  

Pick Out the Key Lessons to Learn from the Situation

Lastly, a failure is truly a waste if it doesn’t lead you to change your approach, and a terrible investment presents a major learning opportunity. In short, what went wrong? Look at the matter analytically with dispassionate detachment. What minor mistakes led to the errant action? What should you have done differently, and what might have happened as a result?

It could be that the investment wasn’t a terrible idea but you rushed in without checking all the minor details (emotional spending is often a problem) — or maybe it was a terrible idea but you were fixated on another matter and took it on faith that it was worthy of your time. Regardless of the nature of your failure, you can learn some key lessons that will leave you much less likely to fail in the same way again.

After all, this is unlikely to be your last investment: there’s nothing wrong with investment in general, and messing up once isn’t a compelling reason to abandon the entire concept. You can learn from this situation and become markedly better at investment, ultimately leading you to a brighter financial future. It’s all up to you.

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