My immediate answer is yes, you can definitely lose money on investments. But don’t leave yet thinking you’ve gotten the full answer you came for. I have a story that will help you.
When I started investing, I was a very conservative investor. This means that I was only willing to invest in low-risk instruments. I ignored anything that will make me see minus one kobo in my investment portfolio.
To a large extent, I still think of myself as a conservative investor, but my risk appetite has definitely grown over the years. This is how I know.
In 2021, I decided that I wanted to diversify my portfolio a bit more and planned a ratio that looked something like this: 50% low-risk investments, 30% high-risk investments and 20% medium-risk investments.
A major part of making right investment decisions begins with knowledge so I began reading a lot and finding out what sort of investments fell under these three categories.
Then something happened with one of my high-risk investments and it looked like I was going to lose a substantial amount from the capital I invested in.
Guess what? I didn’t panic the way I would have.
Of course, it pained me a bit but knowing that I had other low-risk and medium-risk investments helped cushion my disappointment.
So back to the question, can you lose money on investments?
Of course, you can!
The reason a lot of Nigerians think investments only go up is that Ponzi schemes have messed up how people think about investments.
In real life (which is where most of us live), the same way you can earn returns on investments is the same way you can lose money on investments sometimes.
This is because genuine investments give returns based on market performance. Not the Ponzi language of “get 50% returns in 30 days” with no knowledge of what your capital is being invested in.
Why call it “investment” if people can lose money?
Let’s go back to what the word actually means.
I like this simple non-financial definition by Oxford Languages – an act of devoting time, effort, or energy to a particular undertaking with the expectation of a worthwhile result.
While investopedia shares this financial definition – an investment is an asset or item acquired with the goal of generating income or appreciation.
When you invest in low-risk or medium-risk instruments, your number one goal is to preserve your capital. This means that whatever happens, you can always get your money back.
With high-risk investments though, your number one goal is not capital preservation, it is to earn returns (if we’re being honest). This is because a lot of the time, the higher the risk associated with an investment, the higher the likely returns. Take the Crypto market for example. It is so volatile that anyone who invests in it knows that can lose a lot of money, but that they can also gain a lot.
Compare that to investments like government bonds or treasury bills which are low-risk and super steady.
As an investor, just as the definitions shared above state, your job is to devote time, effort and energy to understand what you’re investing in.
Also, remember that the first definition shared states that you invest with the expectation of a worthwhile result. However, not all expectations are met in life. In investments, that happens too.
How to limit losing lots of money
I shared earlier how having a diversified portfolio helped cushion the pain of losing money in a particular investment.
You want to do the same. To limit the loss of a lot of money at any given time, ensure that your portfolio is diversified. Create a ratio that works well for you at this stage of life.
The rule of thumb when investing is that younger people with no dependents can generally afford to invest in more risky instruments while older people with much more responsibilities should be more conservative with investment decisions.
Now that you know that investments don’t mean your capital will always appreciate, it’s time to know your risk appetite. This is what should inform the kinds of investments you put money in.
Discover your risk appetite right now so you can make informed decisions as an investor.
On Cowrywise, you can access all three categories of investments right now. Using the app to pick various investment options is a sure way to diversify your portfolio quickly.
Read to begin? Click here to get started.
The Psychology of Money by Morgan Housel – (This book helped a lot in my investment journey and I’m sure it will help you too. You’re welcome.)