Only Invest What You Can Afford to Lose:
A Good – But Incomplete Advice

“Only invest what you can afford to lose” is probably one of the most common advice there is for a novice investor. And even though the advice itself is very sound, it is very much incomplete on its own or even detrimental to have as the main focus of your investing mindset. Let’s expand a bit on this mother of all advices!

Even if investing can be (and is) a gamble, you should not treat it as such. Investing is a bit more complicated than a matter of placing your bets like a gambler, and checking your results to see whether you won or lost. This is exactly what by going solely on this advice sets you up for – to have the expectations of a gambler and treat investing like gambling with instant gratification (or losses).

A better advice would therefore be:

“Only invest what you can afford to lose. Be prepared to wait for returns on your investments.”

With gambling you might get your instant results for your bets once the results are out, but in investing you need to be in it for the long term in most cases. Sure, there are some quick wins that can be made, but the majority of these would be down to pure luck, or spending a lot of time research and analysis. Realistically the average retail trader & investor will get the best results from sound long-term investments.

So, make sure you invest not only what you afford to lose, but also make sure you are prepared to leave the investment for the duration that is required to reap the profits. Share prices may go up or down but the general trajectory is up for the most of the businesses that are good investments, in the long term.

The absolute worst thing would be to get carried away and put too much of your liquid assets into your investments in the hopes to get a bigger return, only for you to have to realise some of the losses (having to sell) because your investment didn’t become profitable as quickly as you would have wanted. Investing is literally playing ‘the long game’.

Investing isn’t certainly just about being able to handle the losses in the worst possible scenario, or being prepared to wait patiently for the returns. For this to happen you need to invest in assets like stocks of companies that will actually eventually deliver the return!

So, make sure you always are aware of what you are investing in. As an example, you could ask yourself: Do you believe in the company you are investing in? Can you realistically expect the value of your investment to increase based on the current value of the asset? Is the stock overvalued or undervalued?

A much better advice would therefore be:

“Only invest what you can afford to lose. Be prepared to wait for returns on your investments. Make informed decisions.”

What if you have done everything correctly, done your due diligence, and still the stock or stocks of your choosing tank and you are losing money? The sad reality is that this will happen more often than investors would like, but probably the best thing to do is to have a diversified enough of a portfolio that will help reduce the risk. I.e. Don’t put all your eggs in the same basket. By increasing the amount of stocks you are investing in (or funds, they are great for diversifying!), you can mitigate the risks even further.

Our ultimate advice for beginners:

“Only invest what you can afford to lose. Be prepared to wait for returns on your investments. Make informed decisions. Diversify.”

There are of course more considerations to investing than just the ones mentioned, but hopefully this fairly short advice will help you get started in investing – safely!