Yes, you can lose all your invested money in stocks.
That is the easy and short answer, but no reason to take all your money from the market and run! Let’s look at the facts and see what is behind this answer.
Investing is, and always will be, risky. You take your money and put it behind a company in the hopes that this company will grow over time, giving you a positive return on your money. It is easy to see that this equation does not always work out in your favor.
However, that is not the full picture, as there are other ways how you can lose your money in the market.
Companies Can Fail In Their Mission
Companies come and go all the time. Products you use today might not be around anymore tomorrow. When that happens, their stock price will fall to $0.
There are many reasons why a product can fall out of the consumers’ favor. Maybe a better product entered the market, rendering the one from your company obsolete.
When companies get disrupted, they can sometimes be slow to react. Failing to invest in innovation and research always comes with the risk of disruption.
Especially if a company is still in a very early stage, it can be fragile. The smaller a company is the higher your investment risk. Penny stocks are a good example. A lot of penny stocks are very small companies. It is easy to look at a stock price below $1 and think, “It only has to go to $10 for me to 10x my investment!” But for that to happen, the company has to grow 10 fold too! That doesn’t happen overnight. And it also doesn’t happen without a good reason. Penny stocks are a risky endeavor and can cause you to lose all your money in a stock.
How Nokia Lost Their Competitive Advantage
Maybe you still remember the time when everyone had a Nokia Phone? It didn’t take long after Apple entered the market with the iPhone in 2007, and nobody wanted to have a Nokia phone anymore. It only took 7 years to completely evaporate Nokia’s market lead. All it took was Nokia ignoring a trend that, in hindsight, was inevitably disrupting the market. By the time they realized their mistake, it was already too late.
This example shows how easy it is to miss a beat and pay the brutal price of disruption. It can completely destroy your business model and your competitive advantage. After all, your moat from today may not be a moat tomorrow anymore.
When Blockbuster Inc. Ignored Its Biggest Competitor
Blockbuster Inc. was a video rental store chain in America that was founded in 1985. Over 2 decades, it grew into 9,000 locations. In 2000, Blockbuster decided not to buy Netflix when it could have bought it for a mere $50 million.
Again, when Blockbuster noticed the trend to a more online-focused consumer, it was already too late. Netflix continued to take market share until Blockbuster filed for bankruptcy in 2010. If you had invested in Blockbuster, then you would have lost your money in that stock.
How Diversification Protects Your Investments
The company behind a single stock can absolutely fail.
The best way to navigate the risk of investing in capital assets is diversification. When you spread out your investments across many companies, the failure of one company will not affect you in a major way.
I like investing in individual companies. When doing so, I always recommend a portfolio of at least 25 different companies. But there are also other ways to diversify your portfolio. You can also invest in ETFs (Exchange-traded funds), index funds, mutual funds, etc. These financial products make diversification very easy.
A hybrid approach is also possible. You could invest 50% of your portfolio in individual stocks and the rest in ETFs. That way, you get a bit from both worlds, so you don’t have to worry about diversification too much.