How can you possibly lose on investments in stocks?

Question

Is there any way to actually lose to stocks? Once you buy stocks on 'X' day of the month, the chances of stocks never actually going above and beyond your point of value on the chart are close to none. Same goes for the assumption that a company can go downhill [and shutdown]. Once again, the chances are close to zero.

Even if the company goes downhill, it is highly likely that its stocks will rise up again. Take Volkswagen for example, in 2015 due to a scandal they were involved in, their stocks went downhill. Now their stocks are starting to rise again.

So, I created a simple graph to demonstrate my thoughts on this [excuse the great MS-Paint art]:

Please explain to my why my thought is [in]correct. It sounds logical to me. There is no way to lose in stocks. I think the problem with most buyers is that they desire the most gain they can possibly have. However, that is very risky. Therefore, it's better to be winning [small/medium] amounts of money (~)100% of the time than [any] amount of money <~25%.

Answer 1

In your own example of VW, it dropped from its peak price of $253 to $92. If you had invested $10,000 in VW in April 2015, by September of that year it would have gone down to $3,600. If you held on to your investment, you would now be getting back to $6,700 on that original $10,000 investment.

Your own example demonstrates that it is possible to lose. I have a friend who put his fortune into a company called WorldCom (one of the examples D Stanley shared). He actually lost all of his retirement. Luckily he made some money back when the startup we both worked for was sold to a much larger company.

Unsophisticated investors lose money all the time by investing in individual companies. Your best bet is to start searching this site for answers on how to invest your money so that you can see actual strategies that reduce your investment risk.

Here's a starting point:

Best way to start investing, for a young person just starting their career?

If you want to better illustrate this principle to yourself, try this stock market simulation game.

Answer 2

Once you buy stocks on X day of the month, the chances of stocks never actually going above and beyond your point of value on the chart are close to none.

How about Enron? GM? WorldCom? Lehman Brothers? Those are just a few of the many stocks that went to 0. Even stock in solvent companies have an "all-time high" that it will never reach again.

Please explain to my why my thought is [in]correct.

It is based on flawed assumptions, specifically that stock always regain any losses from any point in time. This is not true. Stocks go up and down - sometimes that have losses that are never made up, even if they don't go bankrupt. If your argument is that you should cash out any gains regardless of size, and you will "never lose", I would argue that you might have very small gains in most cases, but there are still times where you are going to lose value and never regain it, and those losses can easily wipe out any gains you've made.

Never bought stocks and if I try something stupid I'll lose my money, so why not ask the professionals first..?

If you really believe that you "can't lose" in the stock market then do NOT buy individual stocks. You may as well buy a lottery ticket (not really, those are actually worthless). Stick to index funds or other stable investments that don't rely on the performance of a single company and its management.

Yes, diversification reduces (not eliminates) risk of losses. Yes, chasing unreasonable gains can cause you to lose. But what is a "reasonable gain"? Why is your "guaranteed" X% gain better than the "unreasonable" Y% gain? How do you know what a "reasonable" gain for an individual stock is?

Answer 3

If you're talking about a single stock, you greatly underestimate the chances of it dropping, even long-term. Check out the 12 companies that made up the first Dow Jones Industrial Average in 1896. There is probably only one you've heard of: GE. Many of the others are long gone or have since been bought up by larger companies. And remember these were 12 companies that were deemed to be the most representative of the stock market around the turn of the 20th century.

Now, if you're talking about funds that hold many stocks (up to thousands), then your question is a little different. Over the long-term (25+ years), we have never experienced a period where the overall market lost value.

Of course, as you recognize, the psychology of investors is a very important factor. If the stock market loses half of its value in a year (as it has done a few times), people will be inundated with bad news and proclamations of "this time it's different!" and explanations of why the stock market will never recover. Perhaps this may be true some day, but it never has been thus far. So based on all the evidence we have, if you hold a well-diversified fund, the chances of it going down long-term (again, meaning 25+ years) are basically zero.

Answer 4

For whatever it's worth. Judging from the comments in the other answers, I think everyone is addressing your question, "How can you possibly lose money," there are a lot of ways to possibly lose money in the stock market. Here are my thoughts.

This is a chart of the S&P 500 from about 1996 to about 2012. At the top from the first arrow the entire S&P500 index fell about 45%. From the top of the second arrow the entire S&P500 index fell about 52%.

It is really easy to look at our sustained bull market and feel invincible. And while I'll concede that not every company in the index fell over these two periods, bear in mind that the S&P500 index is a collection of the 500 largest companies in the United States, and the entire index lost half it's value twice. As the companies contained in the index shrink in value, they were replaced by companies that are the new biggest 500 in the country, then those fell too, and so on and so forth until the entire index lost half.

Value is a funny thing because it isn't necessarily tied to the performance of the business (look at the current rosy valuations of all these non-earnings tech-companies). It could be that a company is still performing very well but there are just no buyers for the stock.

So, how can you lose money in the stock market? Very easily. In A practical sense, it's when you need the money and can no longer weather the storm. People who went out for retirement around 2000 couldn't sit around and wait until 2007 for their account values to be replenished. This is why you roll off your stock exposure as you age. As you get older you don't have time and if you stop having income you can find yourself selling your assets at the least opportune time.

Answer 5

Some stocks do fall to zero. I don't have statistics handy, but I'd guess that a majority of all the companies ever started are now bankrupt and worth zero.

Even if a company does not go bankrupt, there is no guarantee that it's value will increase forever, even in a general, overall sense. You might buy a stock when it is at or near its peak, and then it loses value and never regains it.

Even if a stock will go back up, you can't know for certain that it will. Suppose you bought a stock for $10 and it's now at $5. If you sell, you lose half your money. But if you hold on, it MIGHT go back up and you make a profit. Or it might continue going down and you lose even more, perhaps your entire investment. A rational person might decide to sell now and cut his losses. Of course, I'm sure many investors have had the experience of selling a stock at a loss, and then seeing the price skyrocket. But there have also been plenty of investors who decided to hold on, only to lose more money. (Just a couple of weeks ago a stock I bought for $1.50 was selling for $14. I could have sold for like 900% profit. Instead I decided to hold on and see if it went yet higher. It's now at $2.50. Fortunately I only invested something like $800. If it goes to zero it will be annoying but not ruin me.)

On a bigger scale, if you invest in a variety of stocks and hold on to them for a long period of time, the chance that you will lose money is small. The stock market as a whole has consistently gone up in the long term. But the chance is not zero. And a key phrase is "in the long term". If you need the money today, the fact that the market will probably go back up within a few months or a year or so may not help.

Answer 6

I think it may be best to take everything you're asking line-by-line.

Once you buy stocks on X day of the month, the chances of stocks never actually going above and beyond your point of value on the chart are close to none.

This is not true. Companies can go out of business, or take a major hit and never recover.

Take Volkswagen for example, in 2015 due to a scandal they were involved in, their stocks went downhill. Now their stocks are starting to rise again.

The investors goal is not to wait as long as necessary to make a profit on every stock purchase, but to make the largest profit possible in the shortest time possible. Sometimes this means selling a stock before it recovers (if it ever does).

I think the problem with most buyers is that they desire the most gain they can possibly have. However, that is very risky.

This can be true. Every investor needs to gauge the risk they're willing to take and high-gain investments are riskier.

Therefore, it's better to be winning [small/medium] amounts of money (~)100% of the time than [any] amount of money <~25%.

Safer investments do tend to yield more consistent returns, but this doesn't mean that every investor should aim for low-yield investments. Again, this is driven by the investor's risk tolerance.

To conclude, profitable companies' stock tends to increase over time and less aggressive investments are safer, but it is possible to lose from any stock investment.

Answer 7

Easiest thing ever. In fact, 99% of people are loosing money. If you perform worse then 10% annually in cash (average over 5-10 years), then you better never even think about trading/investing. Most people are sitting at 0%..-5% annually. They win some, loose some, and are being outrun by inflation and commissions.

In fact, fall of market is not a big deal, stock indexes are often jump back in a few months. If you rebalance properly, it is mitigated. Your much bigger enemy is inflation. If you think inflation is small, look at gold price over past 20 years.

Some people, Winners at first, grow to +10%, get too relaxed and start to grow already lost position. That one loose trade eats 10% of their portfolio. Only there that people realize they should cut it off, when they already lost their profits. And they start again with +0%.

This is hard thing to accept, but most of people are not made for that type of business. Even worse, they think "if I had bigger budget, I would perform better", which is kind of self-lie.