We’ll give it to you straight: You can lose money in the stock market. But even in rocky times, the entire stock market has never gone to zero.
What about in a bear market or market crash?
Consider the late 2018 performance of the Dow Jones industrial average, a collection of 30 large companies often used to represent the U.S. stock market as a whole. Though December was rough for investors—the index dropped more than 8.5 percent—it still ended the year at more than 23,000, a mile marker crossed for the first time in October 2017 and far above zero.
Not convinced? During the Great Depression, the Dow went as low as 40.56—kind of close to zero, but still better than nothing.
Okay. Technically not hitting zero is probably not all that encouraging, but look at the numbers again: In 1929, the Dow hit a low of about 40, and as of mid-January 2019, it was sitting at just below 24,000. That’s a pretty solid argument for investing for the long term.
What about a single stock? Can it go to zero?
Yes, a company can lose all its value and have that be reflected in its stock price. (Major indexes, like the New York Stock Exchange, will actually de-list stocks that drop below a certain price.) It can even file for bankruptcy.
Shareholders can lose their entire investment in such unfortunate situations. On the bright side, there are protections ensuring that, even though you’re a part owner, you’ll never owe money on behalf of a failing company investment. And you may get some of your money back if a company files for bankruptcy. (Although bondholders and other creditors are prioritized if a company’s assets are liquidated, shareholders are paid if there’s money left over.)
How can I protect myself and my money?
This is why diversification is so important. You don’t want to put all your money in a single investment and risk losing it. Instead, you want to have a well-diversified portfolio, spreading your money across stocks, bonds, cash and other assets—some of which should be up when others may be down.
Investment funds—particularly exchange-traded funds (ETFs) that track an index like the S&P 500—offer a relatively low-cost way to do just that because they offer exposure to hundreds or even thousands of stocks and bonds in one fell swoop. This minimizes the probability that all your investments are down at the same time and maximizes your shot at achieving your financial goals.
January 22, 2019