Finance: Are Stocks Really Too Risky?

 

(Drivebycuriosity) - The stock market is on an all-time high but a lot people missed the rally. Many people don`t own stocks. Many claim that stocks are "too risky". Are they? Yes, an individual company can go bankrupt and her investors can lose all their money. But this risk will be avoided by diversification. Don´t put all eggs in one basket.

You can buy the US stock market, represented by the S&P 500 index, in one piece by purchasing index funds or ETFs (Exchange Traded Funds) on the S&P 500. These funds have very low costs because they don`t need a fund manager, they don´t have research and they don´t speculate with their customer´s money. These investments follow exactly the up-and-downs of the stock market. Yes there will be corrections (a loss of 10%+), bear markets (a loss of at least 20%) and crashes. But all these losses are temporary and they all got erased over the time as the recent all-time highs show.

The graphic below shows that the US stock market, represented by the S&P 500, grew on average annually 6.7% since 1950, even that dividends are not included (annually 2-3%). Investors who reinvested their dividends got an even higher return. The University New York calculated that since 1928 the US stock market (S&P 500) created an average return of about 10% p.a (stock market gains plus dividends reinvested nyu.edu/ investopedia). 

 So an investment into the stock market doubled its value every eight years, thanks to the interest compound effect (compound). That makes 4-times after 16 years and 8-times after 24 years. Even a small investment can grow into a fortune over decades, good for retirement.
 

I also found a historical chart which displays stock prices since the 15th century! (history). The chart shows that stock prices have been going up over the time and their fluctuations (crashes & bear markets) got smoother. I think this is a result of a general learning process, humans - including economic policy - got smarter and made fewer mistakes (I have explained that here driveby )

Even you if you had invested in the year 2007 at the stock market peak before the huge downturn you would have doubled your investment by today, in spite of recession & stock market crash of 2008 (chart below). 

And: Since 1950 the S&P 500 has NEVER suffered a loss in a 20-year period (nasdaq).

 

Anyway, everybody should put some money back for retirement. If your retirement is 10 years away or more than the risk of losing money till then is extremely lows and the reward is high. But it seems that many people have a biased perception on risks. Many take high risks by smoking, drinking to much alcohol, driving too fast, climbing on mountains, skiing, jumping into shallow ponds and many other activities. These activities all can all harm and even kill, stock market losses - which are just temporary for investors with patience and a time horizon of 10 years and more -  are much less harmful.

I agree that sitting out a correction or even a bear market needs patience and stamina  - but the rewards are high. 

Enjoy!