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MAKING MONEY WORK

How Much Investment Risk to Take

By Bill G. Page
Author

CBN.com Risk is multifaceted. Some risks must be taken since the greatest hazard in life is to risk nothing. To risk nothing is to gain nothing.

Investing always involves some risk. Stock investments can be very risky in the short run; however, in the long term, the risk of loss in stocks decreases dramatically, eventually disappearing.

Stock prices will go up and down. Short-term speculating in the stock market is a formula for disaster. Extraneous factors and speculation greatly influence short-term results in the stock market; however, they have little impact in the stock market on long-term results.

You achieve maximum total returns by investing for the long term in top-quality companies that are leaders in their fields, have excellent managers, and have excellent balance sheets.

Since 1926, the Standard & Poor’s 500-stock index’s odds of increasing have been as follows

S&P Odds of Increasing Over Period of Time
7 to 3 Any 12-month period
9 to 1 Any 5-year period
25 to 1 Any 10-year period

Stock market declines are unpredictable in timing, magnitude, and duration. Since 1953, the average market drop has lasted 8 months with 75 percent of the declines recovering within seven months. Full recoveries on average were achieved in just over a year.

Short-term movements in the stock market cannot be predicted with any great accuracy. Intermediate and long-term movements in the stock market can be predicted with more accuracy.

In general, stocks lose money about one-third of the time and make money about two-thirds of the time. Investors must be financially and psychologically prepared for the ups and downs of the stock market.

View temporary downturns as the price of investing and part of the process in achieving higher returns over the long term. Every portfolio will have winners and losers. All investors eventually select a security on which they lose money. In fact, even exceptional investors are only correct about 6 or 7 out of 10 investment choices.

It is essential to obtain the proper mix of investments for your overall portfolio to achieve the right amount of diversification to protect against losses in any one investment area. This portfolio mix will change with each stage of life you go through—the younger you are, the more time you have to wait out market corrections and the riskier you can be with your investments. The older you are, the less time you have to wait out market corrections and the more conservative you need to become in your investments.

The stock market provides investors’ opportunities that are difficult to match with other investments regarding the risk-reward ratio—the amount of risk you must take to receive the reward or return.

After 20 years, you are virtually assured of making money with stocks. Long-term investors can reasonably expect to earn about 10 percent from their stock investments versus around 5 percent on government bonds and 3.6 percent on treasury bills.

A well-balanced portfolio includes stocks and their higher returns to offset the lower returns of safer investments such as bonds and treasury bills. Well-balanced portfolios contain the proper mix of stocks, bonds, and cash reserves to match your time horizon, risk tolerance, and personal financial situation.

A well-diversified portfolio includes several asset classes and sectors designed to allow your portfolio not only to profit from advances in the market, but also to protect you against substantial losses during market corrections. Asset allocation is one of the most important decisions investors can make.

The greatest risk, of course, is not having faith and belief in God because you lose life eternal in heaven. “ Be faithful until death, and I will give you the crown of life”—Revelation 2:10 (Soul Care Bible ).

 

I have a new book/CD ROM called Making Money Work: A Christian Guide For Personal Finance that can be ordered online at www.MakingMoneyWork.us. It includes lots of suggestions on savings plans along with information on many other financial concepts. The book comes with a CD ROM that has calculators to help you analyze, plan, and achieve your financial goals.

This article is adapted from Making Money Work: A Christian Guide For Personal Finance with permission of Willie Glenn Page, Inc. © 2005.


 

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