Forget making your money back the way you lost it. There is another way, but you don't need to reinvent the wheel.
If you've seen big losses in your net worth during the bear market, you undoubtedly want to earn your way back to breakeven, at least. Yet if you fire up the risk level on your portfolio in a last-ditch attempt to reach your financial goals, you're just as likely to end up a whole lot poorer.
Don't Go Overboard
Now it's true that you've heard a lot of people talking about what a great time it is to get back in the market. With the overall market still trading at levels around 37% off its 2007 highs, it's a lot easier to justify buying shares now than it was back then.
Moreover, particular segments of the market appear to present some really attractive investing opportunities. For instance, although the oil price has recovered off its lows, energy shares like Royal Dutch Shell (LSE: RDSB) and Dana Petroleum (LSE: DNX) are still trading well off their 52-week highs. They might give investors a second bite at the trading-profits apple.
But don't kid yourself. While anything's possible, you definitely shouldn't expect the quick road to recovery that victims of the 1987 stock market crash enjoyed -- or even the relatively short period it took for shares to rebound after the tech bust hit bottom in late 2003.
Going Small
One promising way you might think to earn back your losses in a hurry is by taking on more exposure to small company shares. After all, more mature companies may have some growth prospects left, but those growth prospects are typically small compared to the potentially explosive growth opportunities among younger businesses. If you latch onto a great company before anyone else has heard of it, the sky's the limit as far as possible stock gains are concerned.
But small companies carry big risks. And as cheap as a share may seem right now, it's always possible for its share price to fall further -- and cost you most or all of your original investment.
Moreover, if you're trying to get rich quick, you're more apt to make mistakes like doubling down on a dubious share or ignoring the warning signs that perhaps your initial research missed something important. That's a lesson that investors in everything from British Airways (LSE: BAY) to Land Securities (LSE: LAND) have learned the hard way.
Buy What You'd Buy Anyway
The better way to earn back your losses is by following the same investing strategy you'd ordinarily use. So if falling share prices have left you underexposed to equities, then rebalancing to increase your allocation back to its normal levels will help you take more advantage of a rebound when it comes.
Of course, one question that comes up when you're rebalancing is whether to buy the same shares that created the losses in the first place, or instead find new shares with arguably better potential. Although every investor's answer to that question will differ somewhat, you'll generally want to take the opportunity to fill in gaps.
So if you've loaded up on defensive plays during the recession, a good growth stock like Serco (LSE: SRP) could power up your portfolio, as the economy starts growing again and their facilities management systems and services keep the company powering ahead.
Similarly, if you've stayed fully invested in growth shares, bigger value-oriented shares like Experian (LSE: EXPN) or Cable & Wireless (LSE: CW) can add some stability to your portfolio without sacrificing chances for capital appreciation.
Stick To Your Guns
Whenever you lose money, you're more likely than usual to respond emotionally in ways that you'll later regret. As hard as it is, the best thing you can do is to forget about the losses you've suffered and stick with a solid investing plan.
In the long run, the great opportunities that lower share prices are offering should help you offset the hit you took on shares you bought at record highs.
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> This article was first published on Fool.com and was first published on fool.co.uk in April 2009. It has been updated again by Bruce Jackson, who does not have an interest in any of the companies mentioned in this article.
