Nervous Money
Posted on June 3, 2008 - Filed Under Philosophy |
At a recent coffee shop discussion, the topic of “Nervous Money” was broached.
The concept of “Nervous Money” is simple: any money which you’re afraid to lose is classified as “Nervous Money”.
In a more general sense, no one likes to lose. We all like to win. Our entire society hinges on the need to be winners and second place is first loser. Add to this that finances (money) seem to dominate every aspect of our lives. Twenty or thirty years ago, nearly every job offered secured retirement packages with guaranteed income and health benefits. Who was to worry? These days employees must be savvy about 401k, investment plans, brokerages, Roth IRAs etc. Upon turning 68, their very lives will depend on those investment choices.
No pressure there.
When adding the two words “lose” and “money”, this creates a rather nasty situation that can cause people to do irrational things. Back in the 1990’s, shooting up brokerage houses was a monthly occurrence. The other day, a television commercial advertised “If you invested in high risk junk bonds and lost money, call us and we’ll sue!” Some people just don’t handle the loss of money very well.
Sure the argument could be made that risk just needs to be managed, the downside mitigated. I completely agree. But when making an investment, no “100% guarantee” exists that everyone will be a winner. People win, people lose.
I sounded like Gordon Gekko there.
When making an investment people should only invest what they can feel comfortable losing. If any hesitation or doubt creeps into their minds then the investment shouldn’t be made at all. If the rent money is being bet on a single pull of the slot machine then the person shouldn’t be angry when they lose. Betting stupid results in more losses than gains.
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2 Responses to “Nervous Money”
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When making an investment people should only invest what they can feel comfortable losing.
I really hope that I misunderstand you here. That seems like the worst investment advice I have ever heard.
You should make meaningful investments with money that you can’t throw away. This will make it imperative that you do your research so that you investment is sound.
When I started investing, I made small investments so that I wouldn’t worry if they lost some value. What happened was that instead of getting out when I should have, I rode them down down down until they were virtually worthless. A lesson learned the hard way, but one I value greatly.
You shouldn’t be betting with your money, that’s gambling. Investments should be methodical, planned out activities.
@Arty: There’s probably a misunderstanding here. I can’t believe that the ‘best’ investment advice should be “When making an investment people should only invest money they can feel uncomfortable losing.”
This plays right into “Nervous Money”.
If someone has $10,000 saved up should they invest the entire amount because that would make them feel uncomfortable? If they feel comfortable investing only $1,000 then that is what they should invest. Not the entire amount.
Per your example, you started investing with money that wouldn’t worry you if it lost some of its value. This is precisely what I am talking about.
Nobody wants to lose on an investment. Investors analyze, plan out various scenarios. But there is no 100% guarantee that the investment will work. If people can’t stomach that fact, they shouldn’t be investing. If they invest anyway then the are investing with Nervous Money which is akin to gambling.