There are no guarantees in investing.
Well, I guess the only guarantee is that if you don't invest anything, you won't earn anything. But other than that, investing is just about managing risks.
Mutual fund companies advertise with bar charts and graphs when returns are doing well. At the bottom in the fine print, they advise not to rely on past performance. But the bar chart with colors and numbers is all we see.
The presence of risk doesn't mean we don't invest. Life itself is risky. But investing means we understand and manage the risk in order to make a return.
To put our minds at ease, history does support those with long time horizons and who stay in the market and don't buy and sell often. History says the S & P 500 index has returned just over 10% since inception, but that was not a smooth ride.
But capitalism is based on returns on investment, whether that investment is a factory or a knowledge-based business.
And we are all in a different place. Some are young and just starting out with decades to recover from a market crash. Others are near retirement or in retirement and can't go back in time to earn more money in case of a severe decline in share prices.
Other people are more comfortable with risk, and some less comfortable.
Our family situation may determine how much risk we can take.
But the idea is that risk is tied to return. Putting money in the bank will actually cost you money once inflation is accounted for.
So what should we do?
1. Determine how much risk you can accept. Would you sleep at night after a 30% loss? What about 50% or 70%?
2. Diversify. The benefits of diversification may not be as pronounced as years in the past, but spreading out your investments does spread out the risk.
3. Check in regularly with an advisor. Whether you follow all the advice you receive is a personal decision. But an advisor can tell you about aggregate data; how most people are doing in general with the amount of risk you are taking. This insight can be very helpful.
Calculate how much money you will need in retirement and how much you'll need to save to get there. Putting money in a savings account is good for an emergency account, but the returns won't get you where you need to be.
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