Saturday, 13 April 2013

I Might Lose Money on the Stockmarket


Many people are looking for better returns than the miserable rates offered by the banks and building societies in the current climate. Time and time again they will read articles about investing on the stockmarket for better returns but most will avoid this option - the two main reasons they give are:

a) it's too complicated, and

b) the fear of losing money

Well yes, it can take a little time to get to grips with the basics of investing. One of the reasons for starting this blog was to pass on some of the knowledge I have picked up over the years based on my own experience of investing. I have written several articles on what I consider to be my basics for starting out as an investor and these are all together under the ‘basics’ tab above.

In addition there are many excellent articles on the blogs mentioned under the ‘useful sites’ tab. It just takes a little time to become familiar with the investing ‘landscape’ - it may help to make a few notes as you go.

If, having read these basics, you still think it is too complicated, that’s not a problem - investing is not for everyone. However, if you feel you understand the basics - the other obstacle to address is quite a big one for many - the fear of losing money. After all the stockmarket is risky, isn’t it?


Risk

Warren Buffett said “Risk comes from not knowing what you are doing”. To accurately assess your decisions, you therefore need as much information as possible.

If you know very little about investing and someone at the local pubs tells you 5 years back they were advised to invest on the markets and they lost half their money, you may conclude the markets are very risky and not for you. In 2008, the FTSE 100 was at a similar level to today - over 6,350, however 6 months later and it had dropped over 40% to below 3,800.

If you have worked your way through some of the articles and maybe read a couple of good books - Tim Hale’s “Smarter Investing” for example, you will be in a much better position to make an informed decision. You may conclude that cash deposit rates are likely to remain low for many years and are unlikely to provide a return to keep pace with inflation. You may think there’s a reasonable likelihood of getting a better return from equities and possibly bonds. You understand about spreading the risk via diversifying and asset allocation - you know about keeping costs to a minimum and you are looking long term. Crucially, you accept the stockmarkets are very up and down and you believe you can cope with this volatility.

The point is, reliable information will help to displace ignorance. Without this information you are trusting to luck and any decision to invest will be more like a gamble with a high probability of failure. If things don’t turn out as hoped, this will reinforce the uninformed prejudice that stockmarkets are risky.


By educating yourself, you become far more empowered and can therefore take a more measured approach, risk is more accurately assessed and the element of luck and gambling are eliminated and replaced with a more realistic expectation of the rewards you can reasonably expect from the risk you have intelligently taken.

Of course, you may well go through this process of learning all the basics and then decide, for the time being, you are content with the lower returns on cash deposits. I think it makes a huge difference to know that, should you change your mind at some point in the future, you have other options available.

What do you think about returns on cash deposits? Are you afraid of losing money investing on the stockmarket? Leave a comment below.

As ever, slow and steady steps….!


4 comments:

  1. It's a really good point to mention risk. So many people quote risk but have no real idea of what it is. Buying a tracker fund for example gives a level of protection as it is unlikely to ever go to zero unlike an individual share. If all you want is a high income and don't need the capital then the current stock market valuation is pretty irrelevant

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    Replies
    1. Hi Drew,

      Thanks for leaving a comment.

      Risk is always relative and subjective. As you correctly point out, if you are investing for income all that really matters is yield - of course, the higher the market valuation, the lower the corresponding yield!

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  2. Apologies I didn't make that very clear. I meant that once you have bought an investment the value at any particular point in time is almost irrelevant as long as you are still getting the income. Daily or weekly variation in the capital value shouldn't matter if your priority is the long term income potential

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  3. Hi Drew,

    Thanks for clarifying and, yes I agree, once the investment has been purchased, the pure income focused investor need not be concerned about price fluctuation.

    I invest primarily for income but I am also looking for a positive total return. I would therefore be uncomfortable if there was a price under-performance for an extended period.

    The other aspect is share price out-performance can drastically reduce the yield % and there may be better income opportunities to consider.

    Thanks again.

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