The riskier an asset is, the bigger the reward you can expect. But it won’t be a smooth ride. That’s the whole point! No one is gonna hand you dollar bills for taking on 0 risk. That just won’t be fair!
And we know in finance land, nothing gets handed to investors on a silver platter. Except maybe the (ahem) decade-long honeymoon for stocks. But yeah, whatever, putting that aside.
Returns are non-linear. You’ve gotta be prepared for the ups and downs. And big ones too. It’s like a rollercoaster. Your guts might feel like they’re about to spill out but I promise you they won’t actually. Nothing gets us going like a financial horror show but here’s why you should never fall for the thrill.
Zoom out and stocks are anything but risky
Stocks look super risky in the short-term. In the here and now things look so scary, unknown and confusing. Interest rates went from 0 to 5+% in the space of 12 months to cool inflation which btw is still dangerously hot.
Case in point: the US added 253k jobs in April beating all estimates. Though a recession is still on the cards. Here’s 3 simple things you can do to recession-proof your portfolio.
The labour market is still piping hot but they know they have to slow it all down without breaking too many things along the way. Regional banks are tanking. SVB is old news. (You can read all about that mess here + why you should care.)
Now it’s First Republic (thanks, JPM for buying ‘em and saving us) and you only need to look at the stock market to see which bank they think is gonna go under next. Raising interest rates is like a kid running around in a china shop. Stuff is bound to break. Though here’s the curious reason why stocks went up while banks went down!
We’re basically at a point in time where good news = bad news and bad news = good. Totally normal ha ha.
So, yeah, plenty of reasons to be super sulky about stocks. And that’s without mentioning the geopolitical dodginess between US and China. Oh, and the Ukrainian war that’s still very much a thing.
But believe it or not, over the long term stocks are not risky. If you hold stocks for 20+ years you’re almost (and I say almost because the odds are 99% in your favour) that you won’t have lost money.
The longer you hold onto your stocks, the more likely it is that you’ll make money!
Stocks are a compounding miracle. Unlike cash that literally goes nowhere (or has done ever since I was a kid!) and bonds that are so boring they’re like those black school shoes. Annoyingly ugly and practical a the same time.
But you ain’t gonna land your dream job in those or be asked out on a date. Just saying. Stocks are snazzy. And they’re the hardest workers ever. They literally work 24/7 for you so one day you don’t have to.
Volatility is baked into the system. It’s something you should want!
Volatility is a measure of variability of returns. Basically how big the highs are and how low the lows are. If you have a stock with high vol it means you can expect the bumpiest ride ever. Wanna get up close to the highest vol asset? Bitcoin – read here how it can be your lifeboat but 99% of you will be too scared to jump on.
In the end though, the volatility (up, down, up, up, up, down, down – you get the picture!) works in its favour. It gives you those big compounded returns.
We think risk = scary. And yeah, sure that’s half of the equation. But the other half is the reward. That juicy stuff you get from holding things that are a little more unknown. That’s where the risk comes from.
Risk is so interesting. Something could be super-safe but end up being super risky. Let me explain.
Bonds are really safe. At least they’re supposed to be! But 2022 saw a wacko year were basically bonds AND stocks went down. Usually, while bonds are boring, they do give investors some cushion for when stocks take a fall. But last year they were utterly useless.
I work at a private bank and our defensive portfolios – as you can imagine – carry loads of bonds. People who are invested in these things do NOT want to take on risk. They expect a slow ride. More like a walk. With the low risk and the security comes lower rewards. But that makes sense.
Except in 2022, their portfolio fell by like 15%. Clients were panicking. Invested in something they did not dream would ever go down 5% let alone 15%.
So now you see how something seemingly “safe” can turn out not to be. But anyway, we don’t need to bother with those!
The less stocks you have in your portfolio, the less your money will grow. It’s that simple. If you’re young in yours 20s you have so much time ahead of you. You should be taking on that risk. Otherwise how do you expect your precious pot to actually grow and give you what you need?
The stock market has given us yearly returns of about 10% over the long term. (An average! Some years were way higher others way lower.) By contrast, the typical returns for bonds are significantly lower. The average annual return on bonds is about 5%.
The numbers talk for themselves
If you had a cool $10,000 lying around and you invested it in the S&P 500 in 2012, over the next decade you’d have turned that into $32,000. Had you kept that in bonds you’d have averaged $12,000-15,600.
Obviously you’re gonna bite my head off and say waaaait a second. That was during one of the greatest bull runs. When rates were glued to the ground and stocks took off like a rocket. US mega caps were the place to be.
Let’s look at a different time frame. A longer and more representative one.
Here’s the long term growth of $1 in stocks vs $1 in bonds vs inflation!
Over 100 years stocks are king. But in stock market land there are stocks of different sizes. Big guys – your Amazons and Apples and the small guys – the ones no one really knows about. Though those small guys totally stole the prize. Here’s how you can earn superior returns in the stock market by investing in this massively overlooked area!
The evidence speaks for itself. And c’mon, 100 years is a long time. During which, we’ve had WW2, the cold war, countless financial crises and bubbles. And yet stocks still win. By a long shot.
Choose uncertainty over safety to turbocharge your capital
Stocks grow your money. Cash might give you a few % each year but nothing like the average of 10% in the stock market. You know what you’ll get each year.
There are 0 nasty surprises when it comes to your deposit but that means no good surprises too. You don’t get that compounding (money making more money making more money) like you do with stocks.
And bonds squash your capital in real terms (when you add inflation in the mix). Lending a gov $100 when inflation is 10% means your $100 is only worth $90. Sure you get some yield to compensate but your capital ain’t going nowhere.
You’ve gotta take risk to make money. Stocks are risky today but safe forever.
Risk whatever you can afford to lose but if you’re young you’re a time billionaire. You have decades for stocks to work their magic.
Don’t give up now just because we’ve all been bitten by a big fat bear. Dare to stick around and get what you came for.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.