Can You Lose All Your Invested Money? How To Avoid It
It’s a fact of life: Investments come with risks.
Sometimes, it’s a matter of market conditions beyond your control. Other times, it might result from bad decision-making on your part. So, can you lose all your invested money?
You can lose all your invested money. For instance, if you invest all of your money in a single security that tanks, you could quickly lose the entire investment. To avoid that, diversify your investments and do your research before making any decisions.
This article will explore ways you can lose all your invested money and how to avoid them. Read on to learn more.
Note: This is not financial advice, your money is at risk, you are responsible for your financial choises. I am not a licensed advisor – this is just my humble opinions and experiences.
3 Ways You Can Lose All Your Invested Money
Losing money is scary for most people, especially when it involves life savings. You may have heard stories of people putting all their money into an investment, only for it to disappear overnight. But just how does one lose all their invested capital?
Here are a few ways that can happen:
#1 Betting on a Single Investment
If you put all your eggs in one basket, you’re taking a considerable risk. For example, let’s say you invest your entire life savings in a single stock. If that company goes bankrupt, your investment is gone. Besides, even if the company doesn’t go bankrupt, the stock might not perform well. If the stock tanks, you can lose a lot of money — or (in the worst-case scenario) your entire investment.
#2 Losing All Your Money Due to Bad Decisions
One of the most common ways people lose all their invested money is by making poor investment decisions. That can happen in several ways, such as:
- Investing in a company that turns out to be a fraud. Unfortunately, there are plenty of scammy companies, especially in the investment world. Some companies may claim they have a great new product that’ll make you a lot of money, but it turns out to be a sham. If you invest in one of these companies, you can lose all your invested capital.
- Paying too much for an investment. Another way bad decision-making can cost you is if you overpay for an investment. For example, let’s say you bought a stock for $100 per share, but it’s now worth only $50 per share. If the stock price doesn’t go up, you’ve lost half your money.
- Investing in something you don’t understand. It’s essential to know what you’re investing in before putting your money into it. If you don’t research and understand an investment, you could lose all your capital.
#3 Making Emotional Decisions
Investing can be an emotional roller coaster. You might get excited when a stock goes up, and then panic when it goes down. It’s essential to avoid making emotional decisions regarding your investments — as difficult as that is to do in practice.
For example, don’t sell all your stocks when the market crashes just because you’re scared. If you do that, you might miss out on the rebound. On the other hand, don’t hang onto a stock that’s going down just because you’re hoping it will come back. If it doesn’t, you could lose a lot of money.
8 Tips for Reducing Investment Losses
Now that you know some of the ways you can lose all your invested money, let’s look at a few tips to help you reduce your investment losses. After all, even with the best-laid plans, there’s always a chance you could lose some money.
Here are some tips for reducing investment losses:
#1 Diversify Your Investments
One of the best ways to reduce your investment losses is to diversify your portfolio. That means having a mix of investments, such as stocks, bonds, and cash. When you diversify, even if one type of investment goes down, you have others to offset the losses.
#2 Monitor Your Investments Regularly
Another good way to reduce your investment losses is to regularly monitor your investments. That way, you can spot any problems early and take action to fix them. When it comes to investments, you usually have three choices: buy more, hold on to your current investments, or sell.
For example, let’s say you have a stock that’s losing value. If you catch it early, you might be able to sell it before it loses too much value. On the other hand, if you wait too long, you could lose all your invested money due to market crashes.
#3 Have a Selling Strategy
When it comes to investing, most people have a buying strategy. But it’s just as important to have a selling strategy. For example, you might want to sell an investment if it loses 10% of its value. You might also want to sell an investment if it’s not performing as well as you expected.
#4 Use Stop-Loss Orders
A stop-loss order is an order to sell an investment if it reaches a specific price. For example, let’s say you buy a stock for $100 per share. So you might put in a stop-loss order at $90 per share. That way, if the stock goes down to $90 per share, it will be automatically sold.
Stop-loss orders can help you limit your losses. But keep in mind that they’re not perfect. For example, if the stock market crashes, all stocks could go down simultaneously. So your stop-loss order might not sell your stock before it loses too much value.
#5 Have a Long-Term Investment Strategy
If you’re investing for the long term, you’re less likely to lose all your invested money. That’s because you’ll have more time to ride out the ups and downs of the market. For example, let’s say you invest in a stock that goes down in value. If you’re investing for the long term, you might not sell the stock right away.
Instead, you might wait for that stock to rebound. And if it doesn’t recover, you might still have time to sell it before it loses too much value.
#6 Rebalance Your Portfolio As Needed
Over time, your investment portfolio will change. That’s because some investments will go up in value while others go down. For example, let’s say you have a portfolio that’s 60% stocks and 40% bonds. After a few years, the value of your stocks might go up while the value of your bonds goes down.
Doing the above will change the mix of your portfolio. So, it’ll no longer be 60% stocks and 40% bonds.
To keep your portfolio balanced, you’ll need to rebalance it from time to time. For example, you might sell some of your stocks and buy more bonds.
Rebalancing can help you reduce your investment losses. That’s because it can help you sell investments that have gone up in value and buy investments that have gone down in value.
Note: Keep in mind that rebalancing is a long-term strategy. So it’s not something you should do if you’re worried about short-term losses.
#7 Invest Regularly
If you invest regularly, you’re less likely to lose all your invested money. That’s because you’ll be buying investments at different times. For example, let’s say you invest $100 per month in a stock. If the stock goes down in value, you’ll still have your other monthly investments to offset the losses.
On the other hand, if you only invest once, you’re all-in on that investment. So if it goes down in value, you’ll lose all your invested money.
#8 Invest in Safer Investments
If you’re worried about losing all your invested money, you might want to invest in safer investments. For example, you might want to invest in bonds instead of stocks. Or you might want to invest in mutual funds instead of individual stocks.
Of course, there’s no such thing as a completely safe investment. But some investments are riskier than others.
So if you’re worried about losing all your invested money, you might want to invest in less risky investments.
Caveat: Even if you follow all of these tips, there’s still a chance you could lose money. That’s because no investment is 100% safe.
So it’s essential only to invest money you can afford to lose. That way, if you lose money, it won’t significantly impact your life.
For more investment tips, check out Buffett’s Tips: A Guide to Financial Literacy and Life by John M. Longo and Tyler J. Longo (available on Amazon.com). The book describes Buffett’s investing strategies and how you can apply them to your own life. It also explains basic financial concepts, such as the time value of money and compound interest, making it a great resource for beginners looking for (a sort of) passive income.
What To Do if You’ve Already Lost Invested Money
Having a plan in place to avoid losing all your invested money is essential. But what if you’ve already lost money?
If you’ve already lost money, there are a few things you can do.
A) Do Not Panic
First, take a deep breath and try not to panic. It’s normal to feel upset when you lose money. But it’s important to stay calm. If you panic, you might make decisions that aren’t in your best interests. For example, you might sell all of your investments.
But if you sell when the market is down, you could end up selling at a loss. Then you’ll have to wait for the market to rebound before you can get back to even.
B) Assess the Situation
Once you’ve calmed down, it’s time to assess the situation. Start by looking at your investment portfolio. Are there any investments that have lost a lot of value? If so, you might want to consider selling them. But as I mentioned before, it’s important not to sell when the market is down.
You’ll also want to look at your overall investment strategy. Did you put your money in too many risky investments?
If so, you might want to consider selling some of them and investing in less risky investments.
For example, if you’re invested in individual stocks, you might want to consider selling them and investing in mutual funds.
C) Create a Plan To Reduce Further Losses
Once you’ve assessed the situation, it’s time to create a plan to reduce further losses. For the best results, the plan should include both short-term and long-term goals. For example, your short-term goal might be to sell investments that have lost a lot of value. Your long-term goal might be to rebalance your portfolio so it’s less risky.
Whatever goals you choose, make sure they’re realistic. And make sure you have a timeline for achieving them.
D) Implement Your Plan
Once you’ve created a plan, it’s time to implement it. That might involve selling some investments, buying new investments, or both. It’s essential to take action and implement your plan as soon as possible. The longer you wait, the more money you could lose.
How to Pick the Right Investment For You
When it comes to investing, there’s no such thing as a one-size-fits-all approach. What works for one person might not work for another. And what works today might not work tomorrow.
So how do you pick the suitable investment for you and avoid losing all your invested money?
Research Before You Invest
Before you invest, it’s essential to do your research. That way, you’ll know what you’re investing in and why you’re investing in it.
For example, let’s say you’re thinking about investing in a new company. You should research the company before you invest.
- Look at the company’s financial statements. How much money does it make? Does it have a lot of debt?
- Research the industry the company is in. Is the industry growing or shrinking? What are the trends?
- Research the people who are running the company. Do they have a good track record? Are they honest and competent?
Consider Your Risk Tolerance and the Time Horizon
When you’re picking an investment, it’s crucial to consider your risk tolerance and the time horizon. Your risk tolerance is the level of risk you’re willing to take. For example, are you comfortable with a lot of volatility? Or do you prefer more stable investments?
Your time horizon is the duration you’re willing to wait for your investment to grow. For example, are you investing for the short term or the long term?
The longer your time horizon, the more risk you can take. That’s because you’ll have more time to ride out the ups and downs of the market.
On the other hand, if you’re investing for the short term, you’ll need to be more cautious. That’s because you won’t have as much time to make up for any losses.
Evaluate the Potential Returns of Each Option
Once you’ve considered your risk tolerance and the time horizon, it’s time to evaluate the potential returns of each investment option.
For example, let’s say you’re considering two investments — A and B. Investment A has the potential to double your money in five years. Investment B has the potential to triple your money in 10 years.
Which investment is better? It depends on your time horizon.
- If you’re investing for the long term, Investment B is probably the better option. That’s because it has the potential to grow more over time.
- But if you’re investing for the short term, Investment A might be the better option. That’s because it has the potential to grow more quickly.
Of course, returns are never guaranteed. So it’s important to remember you could lose money with either investment.
The following table lists the average returns of different investments in the US in 2020:
|Asset Class||Average Returns in 2020|
|T-Bills||0.09% to 0.17%|
Be sure to watch the following video for more tips on investing:
Hire a Financial Advisor
If you’re not comfortable picking your investments, you can hire a financial advisor. A financial advisor can help you create an investment plan that meets your goals. When hiring a financial advisor, it’s crucial to find someone you can trust.
Ask family and friends for recommendations. And be sure to check the credentials of any advisor you’re considering. Generally, you want to hire someone who is a Certified Financial Planner (CFP).
The Bottom Line
Losing all your invested money is a real possibility. If you’re not careful, you could find yourself in a situation where you’ve lost everything you’ve put into an investment.
To reduce the chances of that happening, follow these tips:
- Diversify your investments.
- Monitor your investments regularly.
- Have a selling strategy.
- Use stop-loss orders.
- Have a long-term investment strategy.
- Rebalance your portfolio as needed.
- Invest regularly.
- Invest in safer investments.