Sirius Minerals’ (LSE: SXX) share price has tanked over the last year, falling nearly 90%. If you’ve lost a lot of money on Sirius, I have sympathy. Losing money on an investment is always painful. Been there, done that!
However, bear in mind that even the best investors (i.e. Warren Buffett) lose money on stocks at times. It’s part and parcel of investing. So, don’t let losses from Sirius put you off investing in the stock market – stocks still remain the best way to build wealth over the long run. With that in mind, here’s my advice if you’ve been a Sirius loser.
Analyse what went wrong
If you’ve taken a hit on SXX, the most important thing you can do, in my view, is learn from the experience (there are five key lessons from SXX here).
Analyse what went wrong. Did you invest money that you couldn’t afford to lose? Were you familiar with the risks of investing in small-cap stocks? Did you have a good understanding of Sirius and its project? Did you have too much exposure to the stock? Were you caught up in the hype?
Think about your mistakes and write them down for future reference so you don’t make the same mistakes in the future.
Having lost quite a large amount of money on small-cap mining stocks during the Global Financial Crisis myself, I can say without doubt, the experience has made me a much better investor. Instead of just focusing on the potential payoff (how much money could I make?) of a stock, I now pay much more attention to risk management (how much could I lose and how would this impact me?).
So, for example, I now:
Invest around 60-70% of my portfolio across a broad range of lower-risk dividend stocks that provide regular income and enable me to compound my wealth
Only invest around 10% of my overall portfolio in small-cap stocks
Only invest around 1-2% of my capital in each individual small-cap stock
Focus on profitable companies when investing in small-caps
Steer clear of small-cap miners
This strategy has dramatically reduced my stock market losses.
Build a diversified long-term portfolio
Once you’ve thought about what went wrong, my advice would be to focus on building a rock-solid long-term portfolio that’s properly diversified and suitable for your individual risk tolerance.
If you’re looking for more stability from your investment portfolio, you may want to focus more on large-cap dividend-paying stocks. These aren’t as exciting as stocks like Sirius, but you’re far less likely to lose large amounts of money and over the long run they can certainly boost your wealth, particularly if you reinvest your dividends.
If you’re keen to include small-caps in your portfolio, make sure you think about risk management. For example, diversify your capital over a number of stocks in different sectors. This way, if one underperforms, your overall portfolio won’t be impacted too badly.
Investing doesn’t need to be complicated. But it’s important to get the basics right and that means focusing on risk as well as reward. If you’re looking to learn more about how to build a winning long-term portfolio, you’ll find plenty of information here at The Motley Fool that could help you.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.