I came across this advice multiple times during my investment journey and I am also guilty of dishing out the same to many over the years. As I grow along my investment journey, I realize that "Only Invest in what you can afford to lose…" is actually not a very good investment advice. Here are the reasons why.
- "Only invest what you can afford to lose" tend to create a mindset that Investing is like gambling. Since the money is something that they can afford to lose, people will tend to take more risk in their investment. They will be more willing to "invest" based on news/tips and are less inclined to put in effort to research on the companies they are investing in, treating their investment like a gamble.
- Investing in what you can afford to lose also tends to limit the amount one is willing to invest. Generally what people can afford to lose is only a small percentage of their wealth. How can you grow your wealth in a meaningful way if they are only investing a small percentage of your wealth?
Personally, I am investing with what I cannot afford to lose to grow my wealth meaningfully. They are money that are needed for my retirement and I have absolutely no intention of losing them. I don’t know about you but I don't invest in something when I think I am going to lose money in them. I understand that it's not possible to win in every investment but the least we can do is to make sure we understand what we are investing in and make decisions that would reduce the chances of losing as a portfolio.
I do have investment where I'm only putting in a small amount of my money, money that I can really afford to lose and will not lose sleep over. They are in riskier investment like cryptocurrencies where I had blogged about earlier here. I treat this investment as a gamble and hope that it will be be a multi-bagger someday when cryptocurrencies goes mainstream. I'm actually mentally prepared for their value to go to zero which unfortunately at one point they actually come very, very, very close to…… 😓.
It is also important to understand that although I am investing with money I cannot afford to lose, they are money that I do not need in the near term. I have my medical insurance and 6 to 9 months of emergency funds setup so that I will not be forced to liquidate my investment if anything unforeseen were to happen. This mean that I will not be affected by the short term volatility of the investment and can focus on the longer term growth of them.
So, next time whenever you come across this advice, instead of thinking that it's money you can afford to lose, treat it as money you cannot afford to lose but do not need in the near term.
Happy Value Investing!