Stock Market Risk, the true cost of skipping investing.
Can you afford to not invest? Unless you started saving at the age of five and are presently making a killer income, consistently year after year, you will probably have trouble saving enough for retirement without investing at least some of you savings.
What is the true cost of skipping the stock market?
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
When advised to start looking into the stock market, have you ever thought something along the lines of, “This is all our retirement money, we can’t afford to lose it!”?
If so, you’re not alone and I get it. I know planning for your future can be scary. Pair stock market risk and volatility with the 24-hour news cycle, and it’s no wonder the fear of watching your hard earned money turn into a big fat pile of nothing looms large.
Reality check- The Biggest Stock Market Risk is NOT Investing
But first, let’s take a look at living off the interest from a bank account over a 30-year retirement. Guess what kind of nest egg you would need to get $100,000 annual income from a bank at 1% (which is more than what many bank accounts are currently paying.)
The answer? You would need a cool $10,000,000 in savings to generate $100,000 of income, per year at 1%, before taxes. In plain English, you don’t get to keep the whole $100,000 because bank interest is taxed as regular income rather than capital gains. Ten million in the bank to earn a net of around $65,000 stops looking so secure now, doesn’t it? While this example avoids the risk of investing your hard earned dollars in the stock market, it doesn’t offer much hope of achieving financial independence.
Go Figure the Risk of No Stock Market Risk.
Given American life expectancies are increasing, fear of going broke in your golden years may feel logical. But let me ask, how do you actually see that happening? If your dread is because of “stock market risk”, you are falling for one of the biggest traps keeping many Americans from achieving financial independence. Very few people really understand the difference between stock market investment risk and volatility. Knowing and understanding the difference is essential if your goal is to have a prosperous retirement.
Stock Market Risk vs. Stock Market Volatility
STOCK MARKET RISK
Stock Market Risk is the probability or likelihood of losses relative to the expected return on any particular investment. For example, a risky stock is one that could pay out big but has a greater potential to be a loser. A risk is a chance (that may, in some cases for some investors, be worth taking).
STOCK MARKET VOLATILITY
Stock Market Volatility is just another way to say unpredictable fluctuation. In reality, it shouldn’t have any positive or negative connotation attached to it. It simply refers to the natural movement of the stock markets, both up and down, and up and down again. For example, some stocks are volatile and their values go up and down. But often times, their values end up being about the same as they were before the volatility.
What this means is that temporary fluctuations in an investment value are completely different from a permanent loss. Don’t be afraid of volatility – for those still accumulating wealth, it really can be your friend.
Seeking Help to Overcome Your Fear of Stock Market Risk
The stock market roller coaster ride may be scary but the odds of achieving financial independence without investing – right up there with winning the lottery or someone leaving you millions – are virtually non-existent.
Remember, no one is saying you have to take on stock market investing by yourself. But what I am asking is that you reassess your attitude towards it. And of course, you should make all investment decisions based on your own personal financial goals, time frames and tolerance for risk. Working with a fiduciary Certified Financial Planner™ to put together a financial road map that includes stocks can help set the path to your financial goals. Perhaps if you know where you are going, and how your investments fit into the picture, small stock market fluctuations won’t seem so scary.
Facing your fears and taking proactive steps, with the guidance of a Certified Financial Planner™, will help you make smarter financial decisions over time. Small, smart improvements in your financial choices today will have compound benefits in the long run.
Live for Today, but Plan for Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles-based retirement planner with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. He is a regular contributor to the Advocate Magazine, Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog. Follow him on Facebook, or via his website www.davidraefp.com