Are you investing for the long term? If so, then shares are (despite their wild mood swings) not risky. The day might end with the stock market down by 10 percent, but that won't change a thing. By yearend the JSE might be worth less than half its current value, but the fact will remain that an investment in stocks — if you're in it for the long term — is not risky. My own investments are but shadows of their pre-downturn selves, yet — and I say this with a straight face — I don't view them as being risky at all.

Shares are extremely volatile, meaning that their values can rise and fall dramatically from day to day, or even year to year. Despite their volatility, shares are one of only a few investments that, over the long term, produce returns well above inflation.

It doesn't happen every year, or even over every five years, but shares have without fail outperformed all other asset classes over longer terms than that. It's a fact that in the past 100 years shares produced better returns than cash (e.g. money markets) in every major market for periods longer than 10 years.

In South Africa, JP Morgan found that over 20 years to the end of 2002, equities beat all other asset classes hands down. The after-tax return on equities was 17.5 percent for this period while inflation was 11.1 percent. Returns on investments in property, bonds, gold and cash (fixed deposits and money markets) did not beat inflation over this time.

The JP Morgan study also compared yearly returns of equities to other asset classes over 43 years to 2002 and came to the same conclusion.

The stock market has never lost value over any ten year period in its entire history. It is, obviously, inevitable to suffer short-term losses but over the long term no other asset class performs better than stocks.

Since 1960 the JSE has plummeted by more than 30 percent a total of seven times and each time prices recovered. Research conducted by Nedgroup Investments shows that if one looks at the South African stock market's total returns over monthly intervals of rolling five-year periods since 1961, not one of the 493 such periods was negative.

Looking past short-term fluctuations, a long-term investor mulling over her or his options for a retirement plan can hardly do better than the stock market as the risk of loss for periods longer than 10 years is close to zero.

Buying stocks with the intention of selling a year or two down the line is risky. Buying stocks so you can retire comfortably fifteen years from now is not.

What is risk?

What is risk? Whatever the technical definition, I define it as the likelihood of my investments not achieving what they are intended to. In other words, I call it risky if an investment is unlikely to accomplish what I had in mind for it.

By this definition, and considering my goal of being financially secure in retirement, stock market investments are not risky while putting my savings in the money market is almost as risky as bungee jumping without a cord.

One could also define risk as 'the chance of losing money' or 'the chance of an investment not beating inflation'. If, like me, you're investing for the long term then by both these definitions stocks aren't risky, cash is insanely risky, while bonds and property fall somewhere in between.

Decreasing the risk of investing in stocks

Obviously, if you invest your life's savings in one or two companies you're taking a huge risk and because stocks are so volatile they're not a safe bet if you plan on cashing in within a short few years. Here's how you can decrease, and possibly even negate, the risks of investing in shares:

1. Don't put all of your eggs in one basket. Diversify your portfolio across a variety of companies across many industries and sectors of the economy.

2. Be realistic and match your goals with appropriate timeframes. If you're investing for retirement in 15 years you can effortlessly ride out even a five year bear market.

3. Invest in Blue Chips. These are companies with proven track records and long histories of stability and profits. Blue Chips usually pay regular dividends while their share prices are generally slightly less volatile.

The longer your investment's time horizon the safer it becomes to invest in shares. For really long-term investments (more than 10 years) it's most certainly safer to invest in shares than bonds or cash and, by my definition, probably also safer than property.

Every single dip in share prices is an opportunity to buy as recovery always follows. There is, however, no need to try and time the markets as shares are, whether cheap or expensive at current prices, the safest way to guaranteed long-term wealth.

Risk averse or ignorant of the facts?

Shares are your best bet for creating wealth, yet many people are too apprehensive to take the plunge due to the perceived risks involved. These 'risk averse' investors are often the same people who think nothing of buying a new car every few years despite the absolute certainty of their 'investment' losing five percent of it's value the moment they turn the ignition for the first time.

So many people are willing to take a risk on a car, but not on investing in shares. Are they really risk averse or merely ignorant of the facts?

Are you afraid of investing in shares? Leave a comment below...

RSS

Digg

de.li.cious

facebook

MORE PERSONAL FINANCE

What will you regret? Advice to a reader who wants to know if he should accept the promotion he's been offered...

Shares: flat as a pancake Allan Gray on why the stock market is set to move sideways for many years...

Medical aid 101 A guide to medical schemes including guidance on choosing one and your rights according to law...