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Back to School Money Questions: Can You Lose Money When You Invest?

You can lose money when you invest.

I really think I did my best work with this last question.  In my experience in working with Minnesota company retirement plan participants, the management of investment risk is the least understood investment management concept.

“Can you lose money when you invest?”

I explained to my kids that if you lose a large amount of money on your investments, it makes it even more difficult to get the money back.

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I explained to my kids what a stop loss was and how it worked in making stock and bond market investments. I tried to relate it to a math problem that they were familiar with from school.

I told them that if you had $100 invested, and you lost $10, you could still get your remaining $90 back.  This is true of any stock and bond market investment that you will ever make.

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I further explained that people who don’t pay any attention to their stock and bond market investments have suffered through several periods in the last few years where they had lost up to 50% of their original investments. This has been especially true of individual investors who try to “buy-and-hold” their company retirement plan accounts.

I did not want to scare my kids away from any stock and bond market investments.  I did want to educate them on always having a risk management game plan in place with any stock and bond market investment they owned in the future.

You can limit the losses in any stock and bond market investments that you make.  This concept is new information for many of the individual investors that I meet.

Last, I explained to them that there were clearly times in the past when stocks and bonds were not good to own.  To remain fully invested in the stock market was a really, really bad idea at certain times of an economic cycle.

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