What should you know?
When it comes to your money, it’s vital to understand what “risk” truly means.
Risk is not market volatility. The main risks that truly matter are:
1. Permanent loss of capital
2. Running out of money before you run out of life
Let’s illustrate investment risk with a simple example:
Imagine you have to cross a busy road, multiple times. There are different ways to do it, some are faster, some feel safer.
Option 1 – Excessive Risk: You dart across the road, weaving between cars, trying to reach the other side as fast as possible. Sometimes it works, but when it doesn’t, the consequences can be severe. This is like going ‘all in’ on digital currencies, or concentrating your wealth in a single company stock.
Option 2 – Considered Risk: You walk to the nearest crossing, press the button, wait for the green man, and cross. It takes a little longer, but you’ll almost certainly get across safely. This is like investing in a diversified global stock portfolio.
Option 3 – Overly Cautious: You stand frozen on the curb, waiting for a break in traffic that never comes. This is like leaving your long-term savings in cash deposits. It feels safe, but inflation and inaction mean you may never get to where you want to be.
Significant risk is present at both ends of the scale.
Impatience to move ahead quickly can lead you to take investment risks you may not fully appreciate, exposing your capital to potential permanent loss.
At the other end, fear of volatility can create apprehension to move cash savings into investments. Over time, that “safe” choice becomes risky too – inflation eats into your purchasing power, and your goals drift out of reach.
The sweet spot sits in the middle.
Investing your money in a diversified global stock portfolio provides a dependable, time-tested path to wealth. It helps your money grow steadily, stay ahead of inflation and create the resources needed to have the future you aspire to.
