How Risky Is It to Invest In The Stock Market?

No matter how in-tune with the universe you think you are, no stock market investment is guaranteed. You can buy as much or as little stock as you want, but the only determinant of your final investment value is its worth at the time you sell.

That means you could potentially get a return much less than your initial investment. Of course, there’s always the chance your returns will be higher than you expect – but this is dependent on many variables. For instance, if you’re simply saving cash in a savings account at a fixed rate, then you basically know how much you’ll have in X number of years.

That said, at least over the long term, stocks usually outperform their cash counterpart. Studies have shown that for ten-year periods over the last hundred years or so, stocks proved to be the better investment around 90% of the time.

Is Now A Good Time To Invest?

But this kind of news doesn’t make the front page. It’s only when the market takes a nosedive that common folk even know what’s going on in the world of investing. It’s these headlines that create the associative pattern of losses with investments.

The hard truth of the matter is that you take chances – of course, with minimal risks – but you take chances every day.

Every day you unconsciously put yourself into situations that could be considered high-risk – driving on the I-95 in Florida, for instance. Even so, we’re not really consumed by the same type of fear that seems to accumulate when we consider risking our assets.

That’s because we’ve learned how to manage our risks related to certain endeavors and have built up confidence in our abilities.

It’s the same with investing. By building up your confidence in your abilities, you’ll be better equipped to make investment decisions, even if there is a bit of risk involved. So is not a good time to invest in the stock market?

Stock Market Investing is Risky If…

…you gather all your eggs into one, neat basket – as in all of your money into just one stock.

For instance, investors who thought Luckin Coffee, WorldCom, and Enron would make them millionaires found out the hard way.

Investors naturally purchase shares, bonds, or other investment products at an agreeable price in the hopes that, over time, the price will rise. You sell, make a profit, and continue investing.

But the key to that positive return is to spread your “eggs” among many baskets. For instance, if you only purchase stock in Company #1 and #1 begins to experience a slack in sales or scandalous upper management dealings, your entire investment is on shaky ground.

However, if you also buy shares in Companies #2 and #3, your overall investment is a collective of the performance of each of the three companies. Company #1’s slipping market share is then balanced out by #2 and #3’s steady or climbing market share.

There’s a name for this strategy – diversification. And diversifying your portfolio doesn’t mean just sticking to investments in different companies. You can spread your investment balance amongst various types of investment vehicles, too, such as investing in the S&P 500, bond market, currencies and other global markets in addition to savings, shares, and other investments.

As You Get Older, Risk Should…

…diminish.

As we age, our outlook on life tends to edge ever closer to conservatism. When we’re young, we like reaching for the stars and going out on proverbial limbs.

No matter our age, it’s best to be wary. For instance, given the current global times, stocks like Zoom [ZM] have traded abnormally high – as high as 100x their sales – which is an absurd valuation unless sales growth is massive.

Diversification, as mentioned above, is not the only thing you can do to minimize risk. Let’s liken this next tidbit to the younger generation’s obsession with social media – logging in multiple times a day to check statuses, likes, and mentions.

A young investor might do the same with tickers. This can induce much unnecessary anxiety – markets fluctuate daily, weekly, monthly, and yearly.

But they also fluctuate greatly from moment to moment. If you’re constantly checking the status of your investments throughout the day, a small hiccup might send you into “sell” mode – when, if you’d held for just a bit longer, you’d have seen it was just a bump in the otherwise long-term aspect of investing. So, what should you do?

Nothing.

Seem a bit counterintuitive?

At face value, maybe. But the idea is that you’re still in the game when the market rebounds. This lets your money continue to grow and actually eliminates the bumps.

And investing for the long term heavily increases your chances of positive returns. In fact, for any 10-year period between 1986 and 2019, the majority of investors had an 87% chance of gains.

Investing in the Stock Market is Risky When…

…you’re not spreading your capital across asset classes.

Investing in just stocks, just a savings account, or just bonds can be risky – especially as you get older.

Spreading your risk among several asset classes is a much wiser approach. For instance, government, corporate, and municipal bonds all provide an opportunity to make money without the risk of market or account value fluctuation like we see in stock trading.

Stocks are one of the most popular avenues of investment, but they aren’t the only option. Take a look at your current worth, current needs, and current income, and compare them to what they need to be come the time you need to access the returns.

This gives you a roadmap to take advantage of multiple investment strategies. You can buy stocks, put money in savings, buy land, invest in bonds or even in foreign currencies – but each type has its own risks and rewards.

So, How Risky Is It to Invest in the Stock Market?

If you don’t invest much time – or you simply throw money at the markets like darts at a board – it’s risky.

If you lack the time to do proper research, consider investing passively in an index fund like the S&P 500.

But remember, all investments – even those considered safe investment strategies – involve risk. There are no guarantees. Markets can be volatile, especially in today’s trying times.

You might see wild, extreme swings in the span of a few days – or hours. If you want to invest only short-term, consider reliable, low-risk investments until you get the hang of things.

Historically on average, from year to year, the stock market has grown around 7%. The moments within each year, however, can dramatically swing both high and low. Markets can fluctuate this way even in the long term.

Always be cautious when playing the markets. And never invest more than you can afford to lose.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.