I'm a big believer in starting to invest early. It's one of the smartest ways to build wealth. But when I talk to millennials, fear is holding them back from starting to invest.
The #1 fear I hear almost every week is this: I'm afraid to start investing because I'm afraid of losing all my money.
My biggest fear right now that is holding me back from investing is the possibility of losing the little money that I have. – Aileen G.
I've talked myself out of just starting numerous times because of [the fear of losing money]. – Jared L.
My biggest fear is losing my investment. I have very little to start with and am afraid of making a wrong move. – Jennifer P.
As you can see, people are afraid of losing money investing. And that's valid – you CAN lose money investing. But to lose all your money? That's pretty rare and hard to do, especially if you're focused on investing versus trading.
Losing All Your Money Investing Is Hard To Do
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% 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. While both of these are huge drops, it's important to remember three things:
1. 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.
2. In both cases, the stock market returned to the pre-crash level years later. Yes, year later, but it bounced back.
3. 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% 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 point is, you have to be completely amiss to lose all your money investing. You have history, time, and strategy all on your side to avoid losing money when investing.
Strategies To Protect Yourself And Your Money
Even though you have the facts about losing your money, the horror stories always stand out. In every instance where you've heard about someone losing all their money, it was because they didn't have a strategy or follow some common sense strategies.
Here are the key strategies to protect yourself and your money:
1. Keep An Emergency Fund In Cash
The first thing to make sure you have in place to protect yourself is an emergency fund in CASH. This should be enough money to cover 6-12 months of your expenses, and it shouldn't be invested in stocks or the stock market. The reason? If the stock market does crash and you lose 50% of your portfolio, your 6 month emergency fund just became a 3 month emergency fund. Not a good idea.
This is just cash to protect yourself. I know it's frustrating to have a pile of money sitting there and not earning anything more than interest, but think of it like an insurance policy that doesn't cost you. It is there to protect you should you need it.
2. Maintain A Diversified Portfolio That Matches Your Correct Allocation
Second, you need to make sure that you have a diversified portfolio. This means holding different stocks and bonds in different industries or areas. When events happen, it's possible that individual companies and even sectors suffer. For example, if you owned Enron stock, that company did go bankrupt and it's stock went to $0. However, the entire stock market didn't, and even other energy companies didn't. It was just one company. But for the people that held 100% of their investments in Enron, they lost everything. That's why you diversify!
How do you diversify? You create an asset allocation that matches your needs, and then you build a portfolio around it. It sounds complex, but it isn't. All it means is picking investments that make sense for you, and are made of up a bunch of different things that aren't related.
3. Monitor Your Positions
Next, you need to monitor your investment positions and follow what's happening in the stock market. You don't need to do this everyday, but you should do it often enough so that you know what's happening with your money.
I recommend that you look at your investments at least weekly, to see how they are performing. If you have a good asset allocation and feel comfortable with the strategy behind it, then you likely only need to trade positions every six months to one year.
If you don't have a good system to track your investments, look at a free tool like Personal Capital. They keep a dashboard of all your investment accounts in one place, so you can always see how they are performing. And it's free!
4. When Uncomfortable, Seek Advice
Finally, if you're uncomfortable with your investment performance, consider seeking out professional investment advice. You can talk to a fee-based financial planner, as they will have no vested interested in the investments you have other than to help you navigate and be successful. If your investments give you an uneasy feeling, this could be a great investment!
What do you think about protecting yourself from losing it all?
I get this impression a lot when talking to investing novices. The loss aversion is so strong and there is an equal fear of the unknown. If you want to consolidate all of your steps into one, though, it would be: Just Buy Apple.
It’s such a great place to start: amazing business, blue chip, huge cash flow, solid dividend, big buyback, trades at a big market discount. What’s not to like?
Your points are great, too :).
Eric
The loss aversion is so strong, but it’s hard for people to see the potential loss of not investing. I don’t know about buying just Apple though… things can change very quickly in the tech world.
I think Millennials have witnessed the catastrophic affect on their parents of the 2008-09 crash. While mathematically accurate, your point that the market has always bounced back becomes, in practical terms, irrelevant at some, unknown, age. If the market doesn’t come back soon enough to make a difference in our finite life spans, then it’s the same as it not coming back at all. 20 and 30-somethings presumably have lots of time to wait for a market recovery; for people older than that, caution and wariness is more than justified, in my opinion.
The larger question in my mind is this: Stocks have become serially crash-prone over the past ~30 years. How is this dynamic consistent with achieving a goal as crucial as securing a comfortable retirement?
Good point about the recovery period, and you’re right about the cyclical nature of the stock market. But I don’t think they’re any more crash-prone in the last 30 years versus the 200 years before that. Markets are always cyclical: there are always recessions and depressions.
I think that having a smart asset allocation across your portfolio, and maintaining adequate cash reserves, is how you focus on securing a comfortable retirement.
This is a good day to revisit this issue since the DOW was down 1,000 pts out of the box this morning and finally closed down more than 500 pts for the 2nd day in a row. If you follow the news it sounds like the investment version of the Zombie Apocalypse. We could have bought Apple as suggested in an earlier comment on 7/6/15. If we did we would be down about 19% at the close today (8/24). Or as noted in item 2, we could diversify a bit. For example 70% in the SPY (S&P 500 ETF) and 30% in BND (Vanguard total bond fund ETF). Since 7/6/15 SPY is down about 9% and BND is about flat. Taken together then we would be down about 7%. In neither case would we have “lost all our money” and in the slightly diversified example we are down less than 10% even though the market is experiencing the biggest declines “since the great recession”.
Thanks for the reminder Frank, and also showing the importance of diversification.