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The Risk of Investing

Published on 20/09/2022

Investing can be risky, let’s face it. We hear horror stories of ordinary people losing £5k on the markets and that’s what sticks with us, that’s what makes the headlines. But actually, why did those people lose £5k?

Is it because they were sensible, took their time, learned as they went along, knew their risk limits, what they were getting into and researched?

Or was it because they invested in the “next big thing” like Gamestop, without knowing what they were doing, the risk involved, and what they were putting on the line?

Yup, you guessed it. More often than not, it’s the latter.

You have to know your limits when it comes to risk. You should be able to sleep soundly with the risk you have in the market. Investing should be fun!

We face and assess risks all the time in our daily lives - making a cup of tea, crossing the road, driving a car - and we each know our limits there. But sometimes investing can feel out of our control, like there is a malevolent force out to get us in the markets - a bit like when you’re on an aeroplane.

Travelling by air can be difficult. You’ve not only got to navigate the queues and the screaming children but then there is the complete control and faith you put into the cabin crew and pilot when you’re in the air. You get to your sunny destination, and all is well again - it was worth the nerves, the frustration and the relinquished control. Now it’s all sun, sea and sangria.

But imagine the return on your investments is the holiday at the end of the flight. Sure, you have to relinquish a bit of control, and it may be bumpy at times, but if you’re in it for the long haul, and you’ve done your research on the right airline and destination, you should end up with a cocktail in your hand at the end of the trip.

With inflation, interest rate rises and the cost of living crisis in full swing, keeping your money in cash savings isn’t going to get you anywhere. It’s the holiday equivalent of standing in a 200-person queue at baggage drop, only to find out that your flight has been cancelled just as you wave goodbye to your bags.

So, how do you go about thinking in terms of loss? In the bull market conditions (bulls strike upwards with their horns - so prices rise) we’ve just come out of, loss feels like a distant enemy. You can feel infallible with stock prices continuing to go up and up and up.

In the current bear market conditions (bears strike down with their paws - so prices fall), where it feels like a continuous downward spiral past zero, it can feel too risky to start investing at all. It’s a space where all you can see are negative, red numbers.

Bear markets are defined as sustained periods of downward trending stock prices, often triggered by a 20% decline from recent highs. They’re often accompanied by economic recession and high unemployment, but bear markets can also be great buying opportunities while prices are depressed.

In either bull or bear conditions, the key to understanding your risk is to ask yourself, “what am I going to do if the market goes down 10%?” and then, “what do I do if it goes down 20%?” If the answer to either of these questions is “sell and get out”, then you should consider reducing your stock holdings as soon as possible.

Investing should be, can be, and is, fun. You shouldn’t have your life on the line, risking everything to get your returns. Sure, that’s how some people operate, and that’s what makes the headlines. But what you don’t read in the news every day and therefore often won’t consider, is that there are millions of people all around the world just vibing out with their investments, kicking back and enjoying the ride, safe in the knowledge that they’ve done their research and that the destination is where it’s at.

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