You work hard for your money and it seems that no matter what you do, you just can?t seem to get ahead these days. This being the case you may think that the best way to ensure financial security is to take no risk with your hard-earned money. The theory behind this line of thinking is that if you take no risk then you will obviously lose no money and will always have your financial nest egg to fall back on in your retirement years, right?
It may seem odd, but this ?no risk? strategy, if adhered to over a sustained period of time, is the riskiest of all approaches that you can take other than not investing at all. In an effort to eliminate risk entirely, you give yourself a false sense of security and you sacrifice real growth ? growth that outpaces inflation.
Why? Leaving your money in a savings account or even in guaranteed investment certificates (GICs) may keep your money safe, but it almost certainly won?t grow enough to meet your financial needs. The returns offered by low-risk investments are often barely enough to keep pace with inflation.
So the real risk is not taking at least some risk with your money. That doesn?t mean gambling everything you own. It means putting at least some of your money into investments which, over the long run, do better than savings accounts and term deposits such as GICs. The problem is that most people are afraid to take any risk.
You?ll never eliminate risk entirely, but you can evaluate it and manage it by thinking long term, diversifying, using professional money managers and keeping a level head. While you may find it difficult to keep composed when you hear negative news about the local and global economies, interest rates or the stock market, it is important to remember that bad news sells. The recent bear market, the worst in the last 90 years, created an avalanche of negative financial news coverage. But when the market recovered the fact was barely mentioned.
If you are one of those people who shudder at the thought of investing in the stock market, then equity mutual funds are an ideal vehicle for reducing risk over the long term while exposing yourself to the higher rates of return associated with the market. Mutual funds are pools of money professionally managed by fund managers. Their job is to seek out and analyze opportunities in the market on your behalf. Mutual Funds can be tailored to fit your risk tolerance and, more importantly, they offer diversification, which means that one under-performing stock doesn?t bring the others down thus eliminating some of the risk.
Elizabeth Hoyle once said ?Remember that the stock market is just a store where prices go up and down. It?s not the stock market that?s scary it?s the behavior of the investors. Investors who panic and sell because the market is down are running from the store when there is a sale on. And if they go shopping when prices are up, they?re lining up to pay more. You wouldn?t do that when you were buying food or clothes so don?t do it with your money.?
Stocks have outperformed all other investment vehicles over the long term.
While the stock market fluctuates from day to day, over the long term stocks have outperformed all other investments. So if you?re investing for the long term, consider having a portion of your of your portfolio invested in stocks: you?ll find that, if done correctly, taking some risk it?s far less risk than not accepting any at all.