Anyone who has been online for more than a day or two knows that the way to get clicks is to have a big, shouting, headline. One popular search engine optimization (SEO) plugin won’t give your title a passing score until it has “a positive or negative sentiment.” Ideally, it also contains a number and a “power word.” Is it any wonder then that financial news headlines scream things like, “Americans Have Lost $900 Billion Since…” or “America’s Richest Tech Billionaires Have Lost $315 Billion In the Past Year?”
How Do You Actually Lose Money When the Stock Market Crashes?
Let’s talk about investing and losing money. First, we are going to talk about net worth and how much equity you have in your home. It’s for a good reason, I promise.
Your net worth is the value of all of your assets minus all of your liabilities. The key word there is all. If your car is worth $15,000 and you owe $8,000 that counts as $9,000 of your net worth. Even that ping pong table in the basement that is worth $50 counts towards your net worth. As you can imagine, this goes off the rails quickly.
The only time you need to know what the value of all your stuff in your house is if you lose it all in a fire and you have to calculate a settlement with your home insurance company. You can pretty much ignore it when it comes to your net worth unless it’s something really valuable, like the kind of thing you insurance specifically with the insurance company.
What Is Net Worth Used For?
Your personal net worth isn’t a very useful metric under most circumstances. If you do calculate your net worth, it’s only real purpose is as comparison against a required amount (you need have a net worth of $500,000 to start a franchise, for example) or as baseline for comparison in the future. As in, my net worth is $250,000 today, my goal is to increase my net worth every year.
No one else cares about your net worth. The cashier at the grocery store only cares if you have enough money in your wallet, or credit limit on your card. The credit card company doesn’t care about your net worth, only if you are or are not making the minimum payment. If you go around telling your friends your net worth, they’ll probably give you a good natured, “Well, good for you,” before changing the subject.
Certain specific, or large, loans may be interested in your net worth, but only after they see your credit score.
Did I Actually Lose $100,000?
The easiest way to understand how billionaires — or regular people– can “lose” so much money and not care about it, we turn to another investment, your home.
For easy math, let’s assume that you own a house worth $400,000 that you paid $300,000 for. Let’s also assume that you have $10,000 in your checking account, and some money in ETFs, 401ks, and IRAs.
Do you have $100,000 because of your house?
Kind of. You could get an equity loan, for example, but there is no magical place where you can just have that $100,000. It definitely counts towards your net worth. Congratulations if you had a net worth goal or threshold that you needed to cross. Otherwise, it’s cool to know your house is worth $100,000 more than you paid for it, but that is really it. This is one of the reasons people should really consider whether paying off their mortgage or not is actually a smart financial independence move.
Let’s take this a step farther.
If housing prices happened to drop in your area due and now your house was worth $350,000, did you lose $50,000? Will anyone come make you write a check for $50,000? Do you need to sell some stocks to raise the $50,000?
Of course not.
The only time the amount of equity in your home matters for anything more than piece of mind is when you want a loan, or you try and sell the house.
That is the catch. In order for you to make $100,000 or lose $100,000, you have to sell the house. If you aren’t planning on your house anytime soon (you have to live somewhere), then it really doesn’t matter to your bills or checkbook how much you have in your house.
You Can’t Lose If You Don’t Sell
One of the hardest things to get across to new investors–those that needed to invest beyond their retirement accounts and a portfolio of ETFs and mutual funds–is that you haven’t lost any money when the current value of the bond drops, if you plan to hold it until it matures. (That’s a crazy sentence. Note to self: Come and fix this when you aren’t in a rush.) That is because every bond is redeemed at face value when it matures.
For example, if you buy a Denver International Airport (DIA) bond, you will get $1,000 when it matures. This is true no matter what price you pay for that bond. If you pay $800 for the bond you will get $1,000 at maturity. If you pay $1,200 for the bond you will get $1,000 at maturity. There is a lot to unpack here which I cover elsewhere, but the key takeaway is that you cannot lose that $1,000 unless you sell, or the bond issuer goes bankrupt. That’s it. In every other scenario you get $1,000.
So, if your plan is to hold 20 $1,000 DIA muni bonds until 2028 when your first born turns 18 so you can give them a head start in the real world, it does not matter that the bond is only worth $888 in 2025. Same thing with your house. If you aren’t selling or getting an equity loan, it does not matter how much your house is worth today, or last month, or last year.
Hopefully, you already see where I’m going with this.
Although stock prices move much more quickly, and with nonstop media coverage, and instant 24/7 values available from your online brokerage or mini brokerage, the fact remains that unless you are selling, or using them for a loan (margin), the value of your investments does not matter until you sell them.
Billionaires Haven’t Lose (or Gained) Billions in the Past… Whatever.
The net worth of billionaires is calculated by valuing their known holdings. For someone like Bill Gates, that is a lot of Microsoft stock as well as some other known investments such as Berkshire Hathaway, Ecolab, and Autonation (as of this publication date). You can calculate Bill Gate’s known net worth (KNW) by adding up the value of all his known investments, which involves taking the share price of something like Microsoft and multiplying it by the number of shares he owns.
Now, if the share price of Microsoft goes up, or down, you can write a headline about how much money Bill Gates made or lost. As we have previously discussed, this “worth” is irrelevant as long as Gates doesn’t sell his shares. Otherwise, he didn’t get richer or get poorer. Obviously, this also applies to you and all the other Americans out there.
For example, one of my investments is “down” by just over 15% year to date. This is a long-term portfolio, so the only effect is that the graph in my statement isn’t quite as fun. Although, as I mentioned, this is a long-term investment, so the graph goes back to 2017. If we compare the total value now to then, well then, I have “made” quite a bit of money.
Although it won’t matter until I sell.
Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson owned Microsoft stock, however, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.