22 April, 2020

Quora Answer: What is the Secret to Not Losing Money in the Stock Market?

The following is my answer to a Quora question: “What is the secret to not losing money in the stock market?

The secret to not losing money in the market is to not invest.  However, money that is not invested anywhere still loses purchasing power over time due to the effects of inflation.  Losses are not the problem.  When you put money in the market, and that debt or equity instrument loses value, that loss is a paper loss.  You can hold for long term, and allow it to eventually appreciate in value if the fundamentals of the underlying asset is good; or you can switch over to something else, which may compound that loss in the short term.  However, if you take that money out of the market, that paper loss becomes a realised loss.  There is no recovery from a realised loss, except by covering it with profits earned elsewhere.

It is possible to not make a realised loss if you have picked your counters carefully, and have an extended investment horizon since the market historically rises with time.  That is the natural state of the market, even with cyclical crashes.  It is also important to diversify to minimise risk, so that a fall in one sector of the economy, or one part of the world does not lead to an overall decline in your portfolio.

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