Tuesday, January 22, 2008

Do I Need a Class in Remedial Investing?

I’ve heard friend say it, and I’ve read it countless times: Don’t invest what you can’t afford to lose.

Doesn’t this go against why most people are investing in the first place? I think that far more people are investing so they can live happier and more secure retirements.

Whenever I hear “don’t invest what you can’t afford to lose” my first impression is either the person is being highly condescending because they have money “to thrown around in the stock market”.

Where is the balance? I want to invest for my future (condo and retirement), but I “can’t afford to lose” that money. If I were to follow this popular idea, I wouldn’t invest my money in anything that wasn’t guaranteed…and then I would have less money in the long run (probably). I’m (right now) all in a snit about this, after having read 5 Hot Tips For First Time Investors . If you’re not supposed to invest anything you’re not willing to say goodbye to, how do you invest? Where do you find a balance between secure investments (e.g. savings bonds, CDs) and insecure investments? How does anyone who really believes this suggest someone plans for their future? Yes, the author of the article above says to not invest what you need for your monthly expenses. How are people supposed to save big for the future if they don’t invest in stocks or bonds? Personally, I can’t afford to lose the money I put in my IRA (and at last check a week ago it was down ~10% from my initial deposits). If I can’t afford to lose the money in my IRA, how am I supposed to save for retirement? The stock market is currently on a downward cycle, so should I invest more in my IRA and be optimistic it will eventually have a reasonable return? Investing solely in CDs or government savings bonds simply won’t provide enough income to put me where I want to be financially when I retire.

Note: I do think the author’s other four suggestions sound very intelligent and sound – it’s just this one that irks me – as it has every single time I’ve heard it before. This post is not a rant against the author – just against this bit of financial advice.

Where is the balance between investing for your future and “not investing what you can’t afford to lose”? How is one supposed to invest if they don’t have buckets of money and all their Big Expenses (e.g. home, retirement) already taken care of? It would be one thing if I (or anyone else) already had enough money to live off interest, but like most people, I don’t.

Or is the advice meant as “invest a little when you can, after you’ve funded your retirement fund and have a healthy emergency fund”? I’ve done some googling, and I can’t find anything that really provides more information [than a brief paragraph] on the execution of this concept.

So where does this leave me? How does someone who can’t afford to lose anything invest? I admit that aside from my IRA and 401k, I’m very much a novice to investing, so perhaps I’m interpreting this phrase all wrong. It’s just every time I’ve seen it, I haven’t seen anything that follows up with how to invest when you’re not already financially solid and set for life. I want to invest, but this “well-known” advice makes me think I shouldn’t invest.

2 comments:

The Digerati Life said...

Hello

I hope I can help. That post was an article written by a guest poster on my blog. But you found this article on my blog so let me try to qualify. The author of that post comes from the point of view of investing through trading (in my opinion). However, if you invest via mutual funds, especially more balanced and well-diversified funds such as index funds, the statement "invest what you can afford to lose" doesn't have the same effect. I am fully invested in the stock market using index investing and have not felt afraid doing so.

All my retirement accounts are in the stock market, but they are diversified across US, International equities as well as bond and other asset classes. Doing so diminishes the fear that you will lose all your money in the market.

Don't let that statement get to you -- again, I think it pertains more to trading or investing in individual stocks. With mutual funds, it's not something you should dwell upon too much, especially if you have a really well-balanced, diversified portfolio that can weather the volatility of the markets.

Shana said...

Thank you DL! That makes so much more sense.