Everyone invested in the stock market over the past few months knows what risk feels like. That uneasy feeling in the gut appeared rapidly as the day to day market declines took hold in the waning weeks of last year. What if you could reverse your risk? Indeed, there is a way.
The first requirement for turning the tables on risk is to have complete clarity about what the stock market does and what the stock market doesn’t (and can’t) do. Investing in the stock market does entail an element of uncertainty BUT that uncertainty mostly melts away once you add time. Remember, your investing lifetime encompasses a much longer timeframe than just a few months.
It’s also important to understand that the stock market doesn’t owe you positive returns over short timeframes (a few weeks or months).
The Stock Market Isn’t the Lottery
Investing in stocks allows you to participate in the profits of the underlying companies through dividends and potential appreciation in value. However, the stock market isn’t the Powerball Lottery and you shouldn’t expect your investments in stocks to increase ten-fold overnight and solve all your financial problems forever.
Everyone has different reasons for investing but all investors share one problem they are seeking to solve…loss of buying power. That brings us to the second requirement for reversing your risk. Over the past nine decades, a period that has been well researched and documented, stocks have protected investors from loss of purchasing power better than any other asset class. Better than real estate, gold, oil & gas, commodities or anything else over that timeframe. Acknowledge the long swath of market history and invest accordingly.
Turn Risk Upside Down
Individual investors can turn risk upside down by realizing that stocks provide positive returns about 75% of the calendar years. The sheer volume of data aimed at investors can often be overwhelming but the real question is simple: Do you want to focus on the feeling of risk from 25% of the years where the market declines or understand that the real risk is NOT owning stocks for the long term. The simple chart below shows the performance of Dimensional Global Allocation 60% Stocks/40% Bonds Fund over the past 15 years.
Reversing your risk and changing your perception of risk are good steps along the path to future financial security. Start there. Ready for a real conversation?