Risk!

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#9 - No such thing as risk-free investing.

Three – four years ago, a lot of people looked at investing as a way to instant riches and there was no downside. Now, we all know there is a downside.

The decline of the S&P 500 and the enormous losses suffered by many technology investors in 2000 - 2002 are proof that stock investing can be dangerous.

In investing, risk follows reward as day follows night. The tug of war between risk and reward is the very foundation of the stock market. The two psychological factors that influence investors are fear and greed. Investing is all about the conflict between fear and greed. Investors fear not making money or losing money. Greed kicks in when investors buy high thinking the market will go higher when in fact, it is likely to begin a downward cycle. Fear can be as harmful to investors as greed. You must distinguish between your ability toward and your capacity for risk.

Individually, stocks are wildly volatile in the short-term and moderately volatile in the longer term. Every time you buy a stock or a bond, you’re taking the chance that your money will disappear. If you hold stocks long enough, they become no more risky than bonds.

However, if you leave money in the bank instead, you are almost guaranteeing that your buying power will diminish over time, because of inflation and taxes.

Americans have more than $1 trillion invested in savings accounts that earn around 2% interest---a return that is lower than the inflation rate. And, that is why you must be prepared to take some risks.

Many investors confuse risk with volatility. The real risk in investing is that long-term returns may not keep up with inflation. From that perspective, the riskiest investments are cash, money market funds, and bonds—exactly the ones that many people consider the safest.

As an investor, you must consider how much risk—and what kind of risk—you are comfortable with. It may be enticing to try to get rich in a hurry (greed). But, this only exposes you to the possibility of getting poor in a hurry. And that is why a sound investment strategy relies on the low-risk power of compounding and the discipline of regular saving and investing.