Lots of people think the stock market is risky.
But that isn’t necessarily the most useful or accurate way to look at things for a few different reasons.
For starters, you might think putting your money into Guaranteed Investment Certificates (GICs) or a money market fund or even just a high-interest savings account is the least risky thing you can do.
But that depends on what type of risk you’re talking about.
If you’re talking about the risk of not having enough money saved to comfortably retire, or the risk of running out of money while in retirement, then investing more money into the stock market is actually a way to reduce those risks because, over a long enough period of time, the stock market tends to get better returns.
That brings us to the second point. The stock market is a risky short-term investment. If you’re saving for next year’s vacation, or a new car or house in a few years, then putting your money into the market is far riskier than going with GICs or bonds or a high-interest savings account.
But if you’re not going to need the money for ten or twenty or thirty years, the risk of losing money in the stock market falls dramatically, basically to zero based on historical numbers (also assuming you don’t panic sell when the inevitable dips happen along the way).
And that leads us to a third important detail, which is that those long-term numbers only hold true for indexes of stocks, not individual companies. Picking specific stocks is always a risky proposition because the vast majority of the returns stock markets have generated have come from a tiny minority of companies.
Picking winners is extremely difficult to do, and even then your returns will hinge entirely on the timing of when you buy and sell. Companies like GE and IBM were amazing picks for a long time, then terrible ones. That’s why our investment approach uses index funds.
In short, the idea that the stock market is risky is too simplistic.
It depends on the type of risk you’re talking about, how long you plan to hold the investment, and your investment strategy.
If you’re picking stocks, you always run the risk of losing money. But if you’re betting on US or Canadian or international stocks going up over the next ten or twenty years, and you’re able to ride out the ups and downs along the way, you’re not making a risky bet at all.