Let's Talk About Risk

I think that I mean about the same thing that you mean when I say "money", with the possible exception of your house. I think of my stock holdings sort of like money in the bank. It's not exactly the same thing, but pretty close. Your house is different because you live in your house. Many people think of a house as an investment because they hope it will increase in value over time, and it kind of is, but it's more than that. You have to live someplace and, if you didn't own your home, you would be probably be renting someplace. Rent payments are something like house payments but, with rent payments you don't build any equity in the property. If you rent a place for 30 years and then decide to move out, you don't take anything with you when you go, except your furniture and personal possessions, which you would have regardless. If you make mortgage payments for any length of time, the money you paid on the principal is money that you can hopefully recover when you move away and sell the house, so buying almost always makes more sense than renting, one exception being if you don't plan on staying there more than a year or two. The first few years of mortgage payments mostly go towards interest, which you will not recover when you sell. Of course there is a certain amount of risk in owning a house, so let's talk about risk.

People tend to think of risk as an all or nothing proposition, like when you risk your life, but financial risk is seldom like that. With your house, you can cover catastrophic risk with insurance, but I don't think you can buy an insurance policy for the other kind of risk. The other kind of risk is that, when you go to sell your house, you won't get enough money out of it to cover what you still owe on the mortgage, or you won't get enough to buy another house of similar value. This happens if property values in your present neighborhood go down, but the property values in your new neighborhood do not. It also can happen if property values all over the country go down, like they did in the last financial crisis. A lot of people who used to be home owners are now renters because of that. Maybe they lost their job or something and could no longer make their house payments. The bank foreclosed on their house, but couldn't sell it for what they had into it, and the homeowner was stuck for the balance. About the only way out of that is to declare bankruptcy, which many people did.

Risk in the stock market is something like that. The only way you could lose all your money is if you  owned stock in only one company and that company went bankrupt. When GM went bankrupt, it didn't wipe me out because, although my mutual fund owned some GM stock, they also owned stock in thousands of other companies that didn't go bankrupt at the same time that GM did. This is called "diversification", and it is something that all investors have to do if they don't want to risk losing everything they have invested. In addition to diversifying your stock holdings, you should also not put all your investment money in the stock market. Although the stock market promises the biggest gains over time, it also involves the risk that, at any given time, you will have less money than you had last year, or even less money than you originally started with.

The total stock market has never crashed all the way down to zero. Without looking it up, I believe that the most it has lost in a short period of time is about half its value, and that's only once or twice in its history. Anything less that 10% isn't even called a "crash", it's called a "correction", and is not at all uncommon. Any kind of dip in the market, however, can last a long time, but it seldom stays at its bottom for long. It may inch up an down for several years, and take up to a decade to get back to where it was before. The way you mitigate this risk is you don't put all your money in the stock market, you diversify it over two or more asset classes, like bonds, real estate, or cash deposits like your bank account. How much you want to risk in the stock market depends on your age, your long term goals, and your risk tolerance. Chances are that your guy at the bank has you well diversified, if he doesn't you should be looking for a new guy.

If we are differing over semantics, I think it's over the definition of the word "gone". Of course, when  you lose money, it's gone from your possession, but it's not gone from the whole wide world. From your perspective, the money has ceased to exist, but it's still out there somewhere, you just don't have it anymore. Similarly, when the total valuation of the stock market goes down, it means that people have taken that money out of the stock market and put it into something else. If they sell their shares at a loss, then the money they lost has gone into somebody else's pocket, probably the people they bought the shares from in the first place, although they have likely passed it on to someone else by now.

Have nice hiatus, or whatever they are calling it nowadays. See you when you come back.