Jordan White DipPFS
Can you lose all your money in the stock market?
Yes, it’s possible you could lose all your money in the stock market. But the risk of losing all your money can be easily reduced with good investment behaviour and some basic knowledge of how the stock market works.
I’m a firm believer that investing in the stock market, when done correctly, should be a key part of any long term plan to build wealth, help protect your money from inflation and achieve your financial goals.
If you’re worried about losing money in the stock market, it can be helpful to think about investment strategies that could increase this risk of loss so that you can avoid these.
Good stock market investing is a long-term game.
To the contrary, investing for short-term stock market wins can massively increase your risk of losing money.
While the idea of stock trading – buying and selling very often - can seem trendy and exciting, it’s best to leave this to the professionals.
Putting pressure on yourself to make money quickly is a sure-fire way to increase the possibility of losing money. It can make you panic and sell a poor investment so that you can re-invest it quickly in something else.
The general rule on investing time frames is that if you need the money in less than 5 years, investing it is not a good idea. There is a very real chance you could lose money.
Individual stocks can go from hero to zero.
When it comes to investing, you’ll often hear the phrase ‘don’t put all your eggs in one basket’. This means that if you invest all your money into one stock (one company), there is a very high risk of losing a lot of money.
Stock prices naturally go up and down. Even the most successful companies in the world never sustain constant increases in their stock valuations.
You might be excited about the prospect of a company and want to buy stock in it. You might have considered investment advice from somebody on social media who is convinced this stock is going to explode. Putting all your money into one company is effectively assuming this company will do well and you’ll be rewarded for putting your faith in it.
Companies in the stock market can, and do, fail. It’s not common and often involves exceptional circumstances. But there is a real possibility that the stock price of a company you invest in can go to zero. At this point, you’ll have lost all your money.
Some examples of stocks that have gone to zero include:
These companies went to zero for different reasons. But if all your money was invested in one of these, you’d have lost everything. If you’d received dividend payments that were not reinvested into the company, this could have saved you from losing all your money as you’d have received a form of income into your bank account.
Diversification makes it difficult for you to lose all your money in the stock market.
By investing in more than company, your risk of losing all your money reduces.
It’s said that an investment portfolio of individual stocks should contain a minimum of 20 companies in a variety of sectors and locations. So, this could mean a tech company in the USA, a healthcare company in the U.K and a financial company in Japan, for example. Basically, the stocks you hold should be a mix of companies that don't have much relation to each other.
Reducing risk is the aim of the game. And risk is related to losing money. A diversified portfolio of stocks in different industries and countries aims to balance out the overall performance of your stock portfolio. If one stock falls in value, or even went to zero, you’d have other stocks to fall back on.
Be careful of assuming that the trend of buying penny stocks is a good way of creating a diversified portfolio. Penny stocks are attractive because they're cheap. The price of a stock should not be the only thing you consider. And a portfolio of just penny stocks is still a higher risk strategy vs a more typical portfolio of more established companies.
Investing in the stock market vs individual stocks.
There are two common ways of putting your money into stocks. An alternative to picking individual stocks is to invest in the whole of the stock market. This could be the stock market of a particular country, region of the world or even the entire global stock market.
For investors concerned about losing all their money, investing into a whole stock market makes it practically impossible to suffer total losses. Yes, there have been stock market crashes in the past, but stock markets have never totally failed in modern economical times.
Think about this way. You can invest into the American stock market by buying exchange-traded funds, mutual funds or index funds and effectively own a small piece of every company listed on the American stock market. To lose all your money, the entire American economy would need to fail. This has never happened in history. Not even close.
You might have heard about the problems with the Greek economy a few years ago. While the economy suffered heavy losses, the Greek stock market did not fail. You’d have still lost a lot of money if you panic-sold. But my point is, for an entire country to fail would probably mean bigger problems to worry about than the value of your stocks.
Bear markets and downturns can be an opportunity to add value.
Stock market dips and downturns are common. We’re all aware of the issues the global economy is facing at the moment due to inflation and the affects of war and conflict. And uncertainty does not help market conditions.
A Bear market – where a 20% drop is experienced – is less common but still happens. The coronavirus pandemic is a recent example of this.
A lot of people get nervous of market downturns and pull their money out at a loss, thinking the losses will only get worse.
If we look back over the history of the stock market, downturns recover. Bear markets recover and turn into Bull markets – where stock prices are consistently rising.
If you’re a smart investor, you’ll realise the opportunity of buying a diversified range of stocks when they are cheaper. Buying for a lower price and holding onto them for as long as you can gives you a great chance of good returns. This goes back to stock market investing being for the long haul.
Cash needs are a priority.
It’s important to have enough cash before you start investing. While investing can be a great way of building long-term wealth, you need to lay your foundations first.
By having an emergency fund for short-term needs, this will help you feel securer about investing your money for a long time.
Checking your investments too much will increase your risk of losing money.
Easier said than done (and I’m guilty of doing this myself). The more you check your investments, the greater the chance you’ll see a loss and be tempted to sell your stocks for a loss.
Investing needs to feel a bit like being on autopilot. Too many emotions can wreak havoc with an investment strategy.
A good way to get into the right frame of mind is to think of your stocks like owning a property. It’s a long-term investment and even if you saw the value had decreased, it’s not important as you have no intention of selling at the moment.
It's possible to lose all your money in the stock market. However, there are things you can do to greatly reduce the chances of suffering a total loss.
Diversify your stocks across a range of industries and countries
Invest for the long term
Don't check the value of your stocks too often
If you're unsure about picking investments, then consider speaking to a financial adviser or investment adviser.