The phrase, "Only invest what you can afford to lose", when put in quotes, generates 167,000 Google hits and seems to me like one of the hoariest maxims in investing. But what does it mean?
Obviously, something like this is open for subjective interpretation--a no-no for SE sites. But is there any reasonably objective understanding of what "afford" means here? Such as common investing or personal finance conventions (bolstered by economic data or theory) about a specific value for how much "afford to lose" means?
For various toy examples...you could "afford to lose..."
- everything but a six month emergency fund--at any age.
- all but x% of your current wealth, where x is the answer to an age-based equation.
- no more than five years' worth of net earnings.
Also, most asset allocation prescriptions I see suggest a youngish person (say, 40) should be essentially invested 100% in something with risk, with very little guaranteed investments like CDs, other than that famous six month emergency fund. But if one is invested close to 100%, what happened to "only invest what you can afford to lose"?
My feeling is there is something incoherent about this maxim, and I'm hoping the forum can help shine objective light on it by referencing tested ideas or micro-economic theories about it.