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A conservative investor, whose chief concern is safety,
may want to invest everything in U.S. Treasury Bills. An aggressive
investor, whose chief concern is high returns, may want to invest
everything in stocks. Understanding Market Risks: Something to Consider: If you had invested $1 in the stock market in 1920's BEFORE the Great Depression and left it there until today, you would have suffered some wild swings, including the 1929 market crash and the 1987 crash (Remember Black Monday?). But you also would have enjoyed some years in which your wealth soared. In the end , your $1 would have grown to stunning $2,580.88. That's around 11 percent average annual return on your money. If on the other hand you had invested that $1 in Treasury bills, you would have seen only one down year, and the loss would be too small to mention. Still, because your average annual return would amount to only around 3.5 percent, your $1 would have been worth just $14.12. In fact, every type of investment poses some type of risk. While so-called principal risk, or the chance of losing all or a portion of your initial investment, is the risk that most people know about, even some financial instruments that you would call supersafe pose some type of risk. Treasury bonds, for example pose something called interest-rate risk. (When interest rates rise, the market value of older, relatively low-rate bonds falls.) Bank accounts, certificates of deposits, money markets and Treasury bills pose inflation risk, which is the chance that the after-tax return on your investment won't keep pace with the rate of inflation. That means you lose buying power with every dollar you save. Still, there's one reason that stocks tend to worry people more: You never know when stock market is going to dive. Here is the question most risk-averse investor asks "What if stocks fall right before I need to sell?". The presumption is that your plans would be ruined, your finances devastated. However, the real answer to that question may surprise you. There are very few points in history when you would have been behind by investing in stocks, as long as you left your money invested for at least several years.
Rates of Return (Rewards of investing): How much better off? If you had invested $10,000 and earned 11 percent annually for ten years, you would have accumulated $29,890. If the market took a 30 percent loss before you had a chance to sell, you'd lose $8,970 of that, taking home just $20,920. ( If you suffered a 40 percent loss, you'd end up with $17,930.) If you had invested same amount in bonds and earned 5 percent average annual return instead, you would have cashed out with $16,470 after ten years--significantly less than even the postcrash value of your stock portfolio. In other words, because stocks have higher average returns, you can suffer some serious losses and still end up way ahead over the long run. It's important to note that overall market losses this steep--in the 30 percent and 40 percent range are rare. There have been only three times in history when large-company stocks have lost that much of their value in a single year--one in 1931, once in 1937 and one very recently in 2001. Indeed, when you have a long time horizon, the stock market begins to look downright stable. But these statistics track the stock market as a whole--not individual stocks. If you buy individual shares, it's not unusual to suffer 30 percent or 40 percent loss if you happen to buy shares in a company that falls on hard times. Naturally, if that company doesn't recover, neither would the value of your portfolio. That's why you should NEVER invest your entire portfolio in only one or two companies. Instead, you diversify your holdings, buying shares in a number of different companies. Diversifying dramatically reduces your risk. That said, you shouldn't invest in stocks when you don't have enough time to let the market work for you. In any given year, you have about one-in-four chance of taking a loss in the stock market. If you plan to invest for only a few years (less than five years), stocks boil down to a gamble. This is not a wise place to invest your short term needs, such as rent money or down payment for a home. But if your time horizon is five years, ten years, or more--as it is for virtually anyone who is investing for retirement--there is a very good chance that putting at least a portion of your money in stocks will boost the performance of your entire portfolio. There is a saying that says, "Nothing ventured, nothing gained." If you take a little risk, you just might gain a lot.
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