Only Invest What You're Willing To Lose" Is Terrible Advice

“Only invest what you're willing to lose"

You’ve probably heard this before.

Don't you think the statement is very funny?

I mean… who’s actually willing to lose their money?

For people with this mental model, i've notice certain patterns in their investments

• They invest, chuck the money aside and forget about it.
• Hold on to a losing position because they have mentally written it off
• Dip their feet into many things, $10,000 here, $10,000 there

In some cases, people end up not investing.

While the statement may have be said with good intent, it sets the WRONG expectation.

Think about it, what asset class has a good chance to go to zero?

• Does a basket of stock have a good chance to go to zero?
• Does a portfolio of bonds have a good chance to go zero?
• Does Gold have a good chance to go to zero?

All investments carry risk, but are they likely to go to zero?

Probably not.

The phrase only really makes sense when there’s a genuine chance of losing everything.

For instance, an early stage start up which fails completely.

Even 'risky' asset classes as a whole rarely hit zero.

May I suggest, drop "I invest what am i willing to lose" from your vocabulary.

Instead, embrace : "When will I need the money"

Because time

And notice how this question immediately gives your investment a purpose and a time horizon.

You’re far less likely to simply write it off.

As a rule of thumb, if you have use for the money, don't invest.

• If you're going to buy a house in 5 years, you should not invest
• If you need the money to care for aging parent, you should not invest
• If the money is meant for emergency, you should not invest

Then what? Do I just keep cash?

Sometimes, yes. Cash is king, especially for times when you need it.

But what if I still want to invest?

Before you do, know what you're signing up for.

Here's the historical range of return for S&P500 from Jan 1926 to May 2023.

If you had invested for just 1 year

• Your $1 could have grown to $2.63 or fallen to $0.32

If you had invested for 5 years

• Your $1 could have grown to $4.67 or fallen to $0.39

While the odds of investing for 5 years improve significantly, big losses are still possible.

Can you accept the outcome?

Human are loss aversion creature. We feel more pain from losses than the pleasure from gain.

While it feels silly to hold cash, it's a lot sillier to lose cash.

So my suggestion is simple.

Don't invest money you have a use for.

Drop "I invest what i'm willing to lose"

Instead ask, "When will i need this money"

I think you'll make much better investment decisions.