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Investing in Stocks is Risky. Is that Correct?




Investing sensibly in stocks is not risky.

Stock market is made out to be a troublesome place by the number crunching, jargon-filled analysts, fund managers, financial advisors, and other stock markets experts. After all, if they do not make you believe that investing is risky, how will they ever be able to sell you their wares – stock tips, mutual funds, and bad financial products?

The common perception amongst most individuals is that investing is way too risky. Most of these people nurture the dream of becoming rich one day. But ask them how they plan to do it, and the common answer is – By working hard and earning money.

See, hard work is definitely a virtue. But why not let your money also work hard for you? It is, after all, your servant. And the only way you can handle the role of a master is by making your money work hard for you…by letting it grow faster than inflation.

Now, I am not saying that investing is not risky. It is! But only if you are ignorant about the subject and still try your hands at it. If you do not understand it, or if you are not properly educated on the risks involved, investing can be incredibly dangerous.

Just ask someone who lost a lot of money during the 2000 or 2008 stock market crash, what he knew about investing in the stock market except that he was acting on free and hyped-up stock tips received from friends, relatives, business channel experts, and brokers.

As you will arrange a swimming coach for your child who wants to learn swimming, you must get yourself educated if you want to learn about and pursue investing. You can find a lot of mentors (investing legends like Warren Buffett and Ben Graham) and a lot of literature
(their books, shareholders’ letters etc.) that can help you in your investing education and training.

Warren Buffett once said – Risk comes from not knowing what you are doing. By educating yourself in investing, you will know what you are doing. And that will take away a lot of risk from your investment decisions.

Lets look at Analysis of Index for period spanning 30 years from 1981 to 2010 ;

Table – :Positive  Returns

 

Investment Tenure 1 year 2 year 3 year 5 year 7 year 10 year 15 year
Total positive instance 22 20 24 23 23 21 16
Total instance 30 29 28 26 24 21 16
% positive instance 73% 69% 86% 88% 96% 100% 100%

Table – : Highest and Lowest Return

 

Tenure 1 year 2 year 3 year 5 year 7 year 10 year 15 year
Best Return 101% 59% 51% 43% 37% 31% 26%
Worst Return -51% -22% -14% -2% -3% 3% 7%

Table –:The 5 Best and worst Return

 

Tenure 1 year 2 year 3 year 5 year 7 year 10 year 15 year
Best Return 101% 59% 51% 43% 37% 31% 26%
Average of 5 Best 85% 52% 46% 39% 30% 27% 22%
Worst Return -51% -22% -14% -2% -3% 3% 7%
Average of 5 Worst -27% -13% -3% 1% 3% 6% 12%

 

Table – : Negative Returns

 

 

Tenure 1 year 2 year 3 year 5 year 7 year 10 year 15 year
Worst Return -51% -22% -14% -2% -3% 3% 7%
Average of 5 Worst -27% -13% -3% 1% 3% 6% 12%
Average of all negative years -20% -9% -5% -1% -3% NA NA

 

The above analysis clearly suggests that share market or equity investing is volatile in short term but give good returns over a longer period of time.

Therefore, investing in stocks is not risky if you know how to do it the right way. It is taking advice from people who do not know what they are talking about all the time…that is risky.

And the biggest risk is…not investing at all.

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