When we talk with someone who’s new to investing, fear often dominates the conversation. Whether that person is worried that the next bubble is around the corner or that the next stock market crash is about to happen, they often wonder, “Why in the world would I put money in today?”
Today, we’re defining what market risk is (and what it isn’t) to help you feel more comfortable.
Basically, market risk is the probability that the money you invest is going to drop in value and be at a low value when you need it. Let’s say you buy some stock. A year after buying it, you go to sell it because you need the money, but it turns out the stock dropped in value—leaving you with less money that you started with. The risk of losing money is why it’s not the best idea to invest money that you’ll need in the next few years, like for a down payment on a house or for a new car, into stocks. The risk of loss is a very valid fear, because all stocks inevitably go up and down in price over time.
The key to reconciling this fear is realizing that while the value of certain stocks may go up and down from day to day or month to month, most stocks still increase in value over the course of multiple years. What you need to do is invest toward a goal far enough in the future that you take advantage of this long-term growth. The past doesn’t necessarily predict the future, but if you’d have invested in a diverse set of stocks with a time horizon of 3 to 5 years anytime within the last 50 years, you wouldn’t have lost any money by the time you needed it.
What many people don’t realize, on the other hand, is that NOT investing in stocks can be just as risky, if not riskier. Without taking advantage of the growth provided by stocks, people risk not having enough money down the line for their goals. For example, an 8% rate of return on $1,000,000 generates $30,000 more per year compared to a 5% return. That’s huge.
Whether we’re talking about a conservative investment or an aggressive investment, the amount of time you spend in the market changes the amount of risk you actually face. If you’d like to discuss your own financial goals and risk tolerance with a financial planner, click below to schedule a free introductory meeting.