Yes, you can lose all your invested money in stocks.
That is the easy and short answer, but no reason to take all your money from the market and run! Let’s look at the facts and see what is behind this answer.
Investing is, and always will be, risky. You take your money and put it behind a company in the hopes that this company will grow over time, giving you a positive return on your money. It is easy to see that this equation does not always work out in your favor.
However, that is not the full picture, as there are other ways how you can lose your money in the market.
Companies Can Fail In Their Mission
Companies come and go all the time. Products you use today might not be around anymore tomorrow. When that happens, their stock price will fall to $0.
There are many reasons why a product can fall out of the consumers’ favor. Maybe a better product entered the market, rendering the one from your company obsolete.
When companies get disrupted, they can sometimes be slow to react. Failing to invest in innovation and research always comes with the risk of disruption.
Especially if a company is still in a very early stage, it can be fragile. The smaller a company is the higher your investment risk. Penny stocks are a good example. A lot of penny stocks are very small companies. It is easy to look at a stock price below $1 and think, “It only has to go to $10 for me to 10x my investment!” But for that to happen, the company has to grow 10 fold too! That doesn’t happen overnight. And it also doesn’t happen without a good reason. Penny stocks are a risky endeavor and can cause you to lose all your money in a stock.
How Nokia Lost Their Competitive Advantage
Maybe you still remember the time when everyone had a Nokia Phone? It didn’t take long after Apple entered the market with the iPhone in 2007, and nobody wanted to have a Nokia phone anymore. It only took 7 years to completely evaporate Nokia’s market lead. All it took was Nokia ignoring a trend that, in hindsight, was inevitably disrupting the market. By the time they realized their mistake, it was already too late.
This example shows how easy it is to miss a beat and pay the brutal price of disruption. It can completely destroy your business model and your competitive advantage. After all, your moat from today may not be a moat tomorrow anymore.
When Blockbuster Inc. Ignored Its BiggestCompetitor
Blockbuster Inc. was a video rental store chain in America that was founded in 1985. Over 2 decades, it grew into 9,000 locations. In 2000, Blockbuster decided not to buy Netflix when it could have bought it for a mere $50 million.
Again, when Blockbuster noticed the trend to a more online-focused consumer, it was already too late. Netflix continued to take market share until Blockbuster filed for bankruptcy in 2010. If you had invested in Blockbuster, then you would have lost your money in that stock.
How Diversification Protects Your Investments
The company behind a single stock can absolutely fail.
The best way to navigate the risk of investing in capital assets is diversification. When you spread out your investments across many companies, the failure of one company will not affect you in a major way.
I like investing in individual companies. When doing so, I always recommend a portfolio of at least 25 different companies.
But there are also other ways to diversify your portfolio. You can also invest in ETFs (Exchange-traded funds), index funds, mutual funds, etc. These financial products make diversification very easy.
A hybrid approach is also possible. You could invest 50% of your portfolio in individual stocks and the rest in ETFs. That way, you get a bit from both worlds, so you don’t have to worry about diversification too much.
Now that a savings account can also have +5% APY, you can put some amount of money into such an account. This 5% growth is almost risk-free and can further diversify your asset allocation! Money put into a cash account is completely isolated from any market downturn.
Long-Term Investing Can Lower Your Risk
“Long-tern thinking improves short-term decision making.”
How can you mitigate to lose all your money in stocks? Taking a long-term approach to investing is sound investment advice for the vast majority of retail investors. It greatly reduces the level of risk you take and can save you a lot of money over a 20-year period or more.
Another way to think about it is this: With a more long-term view, you take out the stress and daily worries about your invested money. Now that’s not to say that market downturns or similar market conditions aren’t something that will suck. It does, and it usually feels much worse than when the market is up. But these events are just something you need to accept anyway when investing. There is nothing you can do about them.
Mindset: Managing Your Expectations
The good news is that the lowest a stock can fall to is $0. It can’t go any lower than that. How is that good news, you might ask?
Well, it always helps to invert (or as Charlie Munger used to say: “Invert, always invert.”). There is no real limit to how high an investment can go relative to the money you put in. It can double, triple, 10x, etc.
I fully expect ~80% of my stock picks to go to $0 in the long run. But the remaining picks will completely negate all I lost and carry the show entirely. What matters most is time in the market. This hypothesis will only be able to play out over a long time. You need to be patient enough to ever witness that effect.
Final Thoughts – Can You Lose All Your Invested Money In Stocks?
As you can see, you can of course lose all your money in your stock investments. At least theoretically. But by taking some precautions, this risk can largely be mitigated.
If you simply spread out your investments into multiple companies, the chance of all of these companies to fail becomes smaller and smaller.
Another tool in your toolbox is to not concentrate too much on the short term but instead be a long-term investor.
Concentrate on investing in good companies over finding the right time to buy and sell for short-term capital gains.
Invest wisely and stop concentrating too much on bear market and bull market times. Those will always come and go anyway. Throughout your entire investment journey, you will likely live through multiple stock market crashes.
Stop looking at those short-term-oriented news that are thrown at us non-stop, and instead, focus on the value of your investments.
Think about your financial goals and how your investment strategy can support those for many years to come. Manage your risk tolerance and ensure that you feel good about your investments.
There are some aspects that I didn’t cover in this post, like borrowing money to invest in a margin account. These concepts are something I would not recommend doing if you are new to investing. Needless to say borrowing money for investing can make you lose a lot of money too.
Disclaimer: The information in this blog post should not be considered investment advice or a replacement thereof. They are solely provided for informational purposes. Please consult with a financial advisor for any specific questions on your financial situation. Remember that past performance is not a good indicator of future returns. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.
You should talk to a financial advisor and tax professional if your tax situation becomes more complex. Finding a good financial advisor is not easy. I recommend the Garrett Planning Network, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network. These networks can get you in contact with a fee-only advisor. No matter how much money we are talking about, it will not change your costs.
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