The myth
Budget is one of the main considerations when people start investing. Since there is always a risk you’d lose money from investments, you may think it’s only right to start with an amount that wouldn’t wreck your finances if things didn’t work out.
This way, you can protect yourself from losing money that you might end up needing.
The reality
A healthy dose of caution can keep you from making bad investing decisions. You’ll avoid putting money in a product that you don’t really understand, taking on too much risk, or worse, falling for scams.
If you do make a wrong move, or if something out of your control causes your investment to lose value, then it may be easier for you to cope with a relatively small loss.
Keep in mind, however, that the amount you’ll invest affects how much you might earn. Here are two things to consider when setting your investment amount:
- Your money goal should be realistic
How much money do you want to earn through investing? Think about the investment amount that’s OK for you to lose and check whether that’s enough to help you reach your target given the potential returns.
You may need to consider ways to manage loss and invest within your risk tolerance while still keeping your goals within reach.
If you’ll spread risk around through diversification, you may be able to keep potential loss at an “affordable” level even while investing bigger amounts.
- Loss in investing isn’t always set in stone
When the value of certain investments goes down, it doesn’t automatically mean that you lost money, unless you withdraw or sell at that moment.
Though nothing is guaranteed, there is still a possibility that an underperforming investment (like a stock or pooled fund) may recover over time. If you’re investing for a short term, then it may be wise to only invest money you can afford to lose.
Long-term investors have time to ride out the downs and possibly end up on top, and so short-term losses may not matter as much.
Different assets pose different types and levels of risk, and so you should always keep your risk profile in mind as you invest.
Verdict: It depends.
It’s important to prepare for the possibility of loss when investing. Starting out with non-crucial amounts may be ideal when finding your footing as a beginner investor.
Over time, you’ll need to factor in how investing affordable amounts impacts your progress toward goals.
Another way to mitigate risks is to invest only the money you won’t need anytime soon. This means saving up enough for emergencies, paying off any debt, and putting your needs first before you start investing.
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