Dear Dave,

If you invest in the stock market, and the market goes down, what happens to the money? Is it lost?

Danny

Dear Danny,

This is a great question! So many people misunderstand how investments work when the market declines. No actual money disappears. What goes away is value!

Think about it this way. What happens when you buy a car for $25,000 and its value drops to $15,000? There’s no actual money involved. It’s not like you took bills out of your wallet and threw them away, although it may seem like it when you first roll off the showroom floor. You bought an item for $25,000, and now, after time has passed, it’s not worth $25,000 anymore. It works the same way with stocks. If you bought a company’s stock at $50 and the price of it drops to $40, that $10 didn’t go anywhere. It’s just lost in terms of market value, or what someone else will pay you for it. Make sense?

So many people believe we operate with a fixed-pie economy. They think money is gone forever if it leaves one place, but this is a faulty premise, because it can just as easily go to another place. My good friend, Rabbi Daniel Lapin, has a wonderful explanation for how this works. He calls it a comparison of cake versus candles. If you slice a cake and give yourself a bigger piece, there’s less for me. But money isn’t like the cake, it’s like the candles! If you light a candle and use it to light other candles, no candle is diminished. There is even more light!

Communists and socialists believe money is like a cake, and if you get some, there’s less left for me. But if you understand and believe that money is more like the candles, then you’re probably a capitalist. In capitalism, it doesn’t mean you lose just because I win; it can just as easily mean that we both win. Once you get adjusted to this kind of thinking, the marketplace isn’t nearly as scary!

- Dave

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