There’s no denying that in the realm of investing, there’s plenty of jargon that you’ll hear.  Bull markets, bear markets, equities, fixed-income, securities, collateralized debt obligations, etc.  And while the day-to-day investor might have a general knowledge of investing jargon, you’d be forgiven for the occasional misuse of some investment-related concepts.  After all, unless you’re an investment banker, you probably don’t need to know all this stuff.

But there’s one phrase I hear sometimes that is more than an issue of semantics, as it goes to the very heart of why some people may have trepidation about investing in the stock market.  And that is the term “loss” or its past-tense yet equally fear-inducing equivalent, “lost.”

The context to which I’m referring is following a day, week, month, etc. of market declines, and someone says, “I lost so much money in my [IRA, 401(k), brokerage account] recently.”  After the market went on its path downward in early 2020, I heard this several times.  And it’s not just from people, but you probably saw this on the news, where articles ran saying something like “losses suffered in retirement accounts” or “investors lost such and such money.”  

So what’s the issue with this phraseology?  Is it not true?

Well, let’s take an example.  On Monday, the market closes and your account value is $100,000.  On Tuesday, the market declines by 20%, and after closing you go to your online account and it says that the market value is $80,000.  You might then be inclined to say that you “lost” $20,000 that day.  But did you really?

Now, there’s only way you would have actually “lost” $20,000, and that would be if you had deposited $100,000 in your account to start and then sold everything near the close on Tuesday so that you could only withdraw $80,000.  Because you sold your securities at $20,000 less than you paid for them, you actually realized the “loss.”  Which goes to show, for example, why panic selling during a market decline is one way to “lose” money in the real sense of the term.

Assuming you didn’t sell off on Tuesday, it would be more accurate to say that you witnessed a $20,000 decline in the market value of your account.  What’s the difference?  Sounds like semantics, you say….

It’s not, and here’s why.  

Because you still hold the securities, they have the opportunity to bounce back if (and most likely, when) the market comes back.  If on Wednesday the market goes up 31%, then after the close on Wednesday, your account value will be about $105,000.  Looking at it like this, you didn’t really lose $20,000 on Tuesday, did you?  Rather, you just had to ride the wave that is the market.  If you didn’t check your account value between Monday afternoon and Wednesday afternoon, all you’d see is that you’ve gained $5,000.

Investing seems turbulent at times

While this is an extreme example, this tends to be how the market operates over the long-term.  There are times when it goes down and there are times when it goes up.  But until you sell, you don’t really “lose,” or for that matter, “gain,” anything.

When the market declined in February and early March 2020, even though the declines were steep, unless you sold off, you didn’t really lose anything.  In fact, by the end of the year, the market was actually up.  You rode a wave, or maybe a rollercoaster.  It was equally stomach-churning, but the point is that there was really no reason to lose much sleep thinking that you “lost” a bunch of money.  Of course, that’s easy to say in hindsight, not so much when it was happening…

Let’s dispel one more fallacy of “losing” money in the market.  You might say: “well, no, I did lose $20,000 on Tuesday because if I’d sold what I had before it went down, I would have had that money.”  

While that is technically true, it’s an extreme example of timing the market.  Yes, had you sold just before close on Monday and moved your $100,000 to cash, and then bought back in just before the market closed on Tuesday (in time to avoid the 20% dip but capture all of Wednesday’s gains), then in theory your account value could have been $131,000 after the market closed on Wednesday.

Timing the market is trying to draw a clock on a chalkboard; it’s rarely right

This extreme fiction scenario is where a good chunk of people get hung up on the notion of investing “loss.”  Think about what it would take for you to accomplish this in reality.  You’d have to be so perceptive that you thought to cash out your entire account immediately before it declined and then buy back in just before it goes back up.

I’m sorry to say that unless you have a time machine, this is impossible.  And if you try it, even if you occasionally manage to get it right, odds are you’ll come up far shorter than if you just kept your hands off your investments and let them ride the market wave.  

Think of what you’d have to be able to predict to prevail in this scenario.  Nobody can say what the market will do tomorrow – what makes you think you can tell before anyone else?  Not to mention, you’d have to make that prediction before the market closed on the previous day, in time to buy/sell all your holdings while the market is still open.  Even the following day’s stock futures – if you think those tell you anything – don’t come out until a few hours after the market closes.  You’d essentially have to be more perceptive than the market itself.  And if you were, you probably wouldn’t be reading this site looking for general investment knowledge.

The point is: don’t get stuck in this cycle of thinking.  Yes, had you sold before the market declined, you’d have more money, but actually doing this is simply impossible.  Don’t think you lost money simply because you didn’t sell – it’s not real and you shouldn’t think that it is.

Hopefully I’ve made a compelling case that should ease some heartache when the market suffers a decline.  But before we end this post, it’s important to provide a caveat.  And that is, the above assumes that you’re sufficiently diversified, meaning that you hold a variety of different stocks, mutual funds, ETFs, etc.

That is, the “time heals all” mantra may not apply to a single share of stock or if you’ve concentrated your holdings in a single sector of the market.  When a single share of stock goes down, it may or may not be because the market as a whole took a dip. Rather, it could be something internal to the company.  While most stocks do tend to move with the market over time, there are plenty of examples of those that go down and never recover.  On the flip side, there are those that exceed the overall market.  It’s why investing in individual stocks is generally more risky than diversifying – but can also come with more reward.

A single stock might suffer a decline if the company faces an adverse event or, as you’ve probably seen, because its industry loses competitiveness or undergoes a structural shift over time.  Think Blockbuster Video, for example.  It went down and there was no market wave to ride back up – it simply faded into obscurity because nobody rented videos anymore.

The point is that, on average, stocks generally move together, but individually, stocks are erratic.  It’s why diversification is so important and it’s why investing in market-tracking ETFs and mutual funds can mitigate the risk of investing while still offering significant potential upside.  

Try not to focus on the red ones

Even if we’re talking about an individual share of stock, however, it’s still true that you don’t actually “lose” your investment principal until you sell the stock and realize the loss.  But if you start to see a single stock decline, you may consider looking into whether it’s a solid investment to keep.  If it’s part of a dying industry or there are regulatory concerns, or anything that indicates longer-term troubles, it might be worth incurring a smaller loss now than a larger loss in the future.  If anything, you can take the proceeds from the sale and invest in something more diversified, and use the loss to offset some taxes.

Next time the market seems like it’s sinking, remember that historically, waiting it out will keep you on the right track.  Unless it’s a single company that’s declining due to forces other than general macroeconomic conditions, you likely won’t truly “lose” anything so long as you don’t panic sell.