Have you ever thought about putting money into an investment, or lending a friend money for their business, and wondered, “What if I lose this money?”
Don’t brush that worry aside.
A few of my passive real estate investments have stopped paying distributions, the regular payments investors get from a property’s income. The operators are holding onto cash to build reserves, pay for interest rate caps, or stay cautious. They’re trying to protect our orginal investment. I don’t know yet how much we’ll get back.
If I get my capital back without the gains I was hoping for, I’ll be disappointed. That money has been tied up for years, and it buys less now than when I invested it. Still, I’d have it back and can put it to work again.
If I lose a big chunk of it, I’d have to rebuild first.
At this point in my life, I still want my money to grow, but I care more about protecting what I’ve already built.
Whether it’s a friend’s business, a private loan, or a fund someone recommended, ask yourself: what if I lose this money? If you’re close to retirement, changing careers, or about to use your savings, also ask: what would rebuilding it take?
This post:
UNDER THE HOOD
📉 The Math of Losing Money
Think of a $100 item marked down 20%. It now costs $80. Increase that price by 20%, and it’s only $96, because the increase is calculated on the smaller amount.
Your money works the same way. After a 20% loss, you need a 25% gain just to get back to where you started.
The bigger the loss, the more growth it takes to recover:
If you lose… | …you need this gain to break even |
10% | 11.1% |
20% | 25% |
30% | 42.9% |
50% | 100% |
100% | Requires new money |
If you lose half your money, you have to double what’s left just to get back to even. Even at a steady 8% a year, that takes about nine years. (That assumes you reinvest your gains, don’t take anything out, and ignore fees and taxes.)
Real life can be faster or slower. In the 2008 financial crisis, the S&P 500 fell about 57% from its October 2007 peak. It didn’t get back to the 2007 peak until March 2013, about five and a half years later.
An index bouncing back doesn’t mean every investment does. Even when your balance recovers, you don’t get those years back.
If you’re also taking money out to pay bills, you have less left invested to grow back to where you started.
So ask yourself: will you need this money for living expenses while you’re waiting for it to grow?
THE TRADEOFF
⚖️ Is the Extra Return Worth It?
It’s tempting to choose an investment projecting 12% over one projecting 8%. On $100,000, that’s an extra $4,000 over a year, before fees and taxes.
Higher potential returns can come with greater risk. So ask: what’s the worst that could happen, and how likely is it?
Ask whoever is offering the investment what would have to go wrong for you to lose your money.
If you could lose your entire investment, would that extra $4,000 be worth it? A lower return may make more sense if it comes with a meaningfully lower chance of losing your capital. You need to understand the investment to make that comparison. The percentage alone won’t tell you.
When I started investing in real estate, I was prepared for one or two investments to fail. If too many failed at once, I’d be in trouble. So I spread my money across different markets, property types, and operators, and capped how much I’d put into any one deal or with any one operator.
If this investment went to zero, would the rest of your money still keep your plans on track?
MINI ACTION
✅ Consider Both Outcomes
Feeling comfortable with a risk doesn’t mean you can afford the loss.
Choose one investment, business, or opportunity you’re considering. Write down how much you’d invest. Calculate what a 20% loss would be in dollars, then consider losing the full amount.
Finish these sentences:
If it worked, the extra return would help me ___.
If I lost 20%, I would need to ___.
If I lost all of it, I would need to ___.
Be specific: would you need to save longer, delay a move, or use money set aside for something else?
Then ask: Could this investment fail without putting my essential expenses or another important plan at risk?
If the loss would put an important plan at risk, reconsider how much you’d commit.
Use your answers to identify one question you need answered before committing. Could you be asked to contribute more? When could you get your money back? Would you need it before then?
If an adviser helps you, bring those answers to your next conversation.