"Only invest what you can afford to lose", but most of us underestimate the amount that we can put at risk.
It's generally considered prudent to "only invest what you can afford to lose". Everyone will tell you this. But the big question is how much can you really afford to lose?
The truth, I believe, is that most of us grossly underestimate the amount that we can put at risk.
Admittedly, for many people, the amount that they can invest is genuinely zero. Anybody dealing with debt problems, or anybody who has to scrimp to put food on the table and pay the rent, does not have the luxury of being able to invest in shares or anything else.
As Wall Street Journal columnist Jonathan Clements noted: "It's one of the ironies of investing. The rich can afford to take risks but don't need to. The poor need to take risks, but can't afford to".
But between the extremes of rich and poor, there are millions of small investors and potential small investors, many of whom don't realise that they could live a little more dangerously.
Let me give you an example: Two friends of mine, a husband and wife, both work in good jobs. They have a child to consider, but they bought their house a while back, so the mortgage is not a problem. On the whole, they have it fairly good. After spending considerable time and effort researching the stock market, they decided to invest £1,000 in a particular company.
If they got it wrong and the share collapses, it won't really hurt them. But if they're right, and the share price doubles, it won't make the slightest difference to their lives. They just invested what they were comfortable to lose, not what they could afford to lose.
My friends could easily have spread £25,000 across a handful of shares, but that was too scary. Losing a big chunk of that would have hurt, hurt badly, but still would not have seriously threatened their lifestyle or security. The worst that would have happened is that they would have voluntarily skipped a holiday or two, and postponed a new car for a couple of years, if they chose to replenish their funds from savings.
Of course, you can argue their investment of £1,000 was a sensible starting point. Once they learn a bit more about investing they may decide to invest more in future. But the point I'm trying to make is that if you invest in shares, you will lose money some of the time; it's not pleasant, and it tests your resolve. If investing is to be worthwhile, I believe we need to embrace a little risk, and not too little.
And if you're searching for investment ideas, why not take a look at Maynard Paton's Champion Shares -- you can even have a 30-day trial without having to pay a penny!
