Why Stocks are a Risky Long Term Investment

by Redeeming Riches on January 21, 2013

Investment professionals have a love-hate relationship with stocks, and it’s easy to see why. The market as a whole cannot be predicted and it cannot be controlled. In general, those who invest in the stock market see gains–but many more lose everything, and it’s impossible to predict when the market will crash or when it will be booming. The nature of the market makes it a risky long term investment, but most people don’t understand why. After all, hasn’t the stock market always historically risen?

First we need to understand exactly what risk means. In the investing world, investments are riskier when they have more chances of something negative happening. Bonds are low risk because there’s very little that could happen to affect them badly. Stocks are high risk because there are quite a lot of factors that could lead to a disaster. The disaster is what we’re looking at.

Stocks are high risk if you buy shares–which means they actually fail quite often. In recent years, we’ve witnessed several large stock market crashes. The reason stocks are a risky long term investment, thus, is because the longer you remain invested in the stock market, the likelier you are to see a large crash–and that crash can come at any time, including, say, just after you retire. The longer you stay in the market, therefore, the more likely you are to experience a large loss of investment. That’s not to say that you will not experience gains afterwards–you may or you may not. It’s only to say that you will likely, at some point, experience loss, and that leads to a high risk factor.

Does this mean that you shouldn’t invest in stocks? Of course not–stocks are still an excellent investment tool. However, you shouldn’t put all of your faith in stocks. Stocks are often seen as a guaranteed win–a certainty that your money’s value will appreciate. This is not necessarily true. Stocks need to be understood for what they are–a powerful investment vehicle that carries with it a high risk of loss. Stocks should be used in conjunction with other, safer, investments, and it should always be understood that the percentage of stocks in your portfolio should decrease over time.

Once you reach retirement age, you should have only a limited amount of stocks in your portfolio. This is because if the market crashes, you need to have enough money to live with until it rebounds–and there’s no telling how long that will take. As you age, your money should slowly shift to less risky types of investments. The time to be invested in stocks is in your youth, when you can more easily ride out the ups and downs of the unpredictable market.

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