When you talk about investing your money in stocks or related investments, a common doubt is “But you could lose all your money overnight!” This myth remains frustratingly pervasive. The truth is, it’s nearly impossible to lose all your money — especially overnight — if you’re investing properly.
Australian money picture from Shutterstock
As personal finance blog The College Investor explains, there’s a difference between “investing” and “trading”. A lot of the fear about investing comes from people who are actually thinking about day trading. Day trading involves making money by buying and selling individual stocks and riding the highly speculative ups and downs on a given day.
Investing, on the other hand, means creating a diverse portfolio and riding the general growth of the market. While you can lose some money on a day-to-day basis (and we’ll talk about what “lose” means in a second), it’s virtually impossible for your portfolio to drop to zero so long as human civilisation remains intact:
The first thing to know about investing is that you can lose money. It’s as simple as that. You could invest today and see your portfolio drop tomorrow. But to lose everything? That is really hard to do. In the worst stock market crash during the Great Depression, the stock market lost 89 per cent of it’s value. In the most recent stock market crash in 2008-2009, the stock market lost 54% of it’s value from market top to market bottom.
In both cases the stock market didn’t go to $0. Meaning if you invested in the total market, you wouldn’t have lost everything. In both cases, the stock market returned to the pre-crash level years later. Yes, year later, but it bounced back. Both of these events (and almost all market events) happen over time. These huge drops didn’t happen in one day. Yes, there were some 10 per cent or more days, but that return is over the course of about a year. Meaning, you could have sold your positions and lost much less money.
The important thing to remember about investing, of course, is that you don’t actually “lose” any money until you sell something. If you owned a decently diversified portfolio before the crash in 2008-2009 and kept that same portfolio today, you wouldn’t have “lost” any money, because you never sold off your investments and made those losses real.
It takes an incredibly unlikely arrangement of circumstances to lose “all” your money investing, as long as you’re not trying to get rich quick by outsmarting the market. With a decently diversified portfolio, and patience to wait out the down days, it would take a terrible, world-threatening event to cause you to lose everything. Investing can be complicated and intimidating, but not investing can actually be far riskier.
You Won’t Lose All Your Money Investing (If You Take This Advice) [The College Investor]