There are certain things in life you may be tempted to do that you consider risky. Taking a chance on a new job in a city you’ve never lived in? That’s a risk. So is agreeing to let your coworker set you up on a blind date with their neighbor’s daughter’s friend. If your date turns out to be a dud, you might have a pretty painful evening ahead of you.
But if you’re someone who considers investing in the stock market risky, you may want to change your line of thinking. Not only can investing in stocks be a smart thing to do for your future, but it could also end up being less risky than you imagined.
Americans are leery of stocks — and that’s not a good thing
In a recent survey by Fidelity, 28% of respondents said they’d rather take their chances finding
love on a reality TV show than take their chances in the stock market. But if you don’t put your money into the stock market, you run another risk: not growing your money at a strong enough pace to meet your long-term financial goals.
It’s true that investing in stocks carries risk. In fact, there’s pretty much no such thing as a totally risk-free investment.
But one thing you should realize is that over the past 50 years, the stock market has averaged an annual 10% return on investment. If you play it safe and don’t invest in stocks, the return you’re able to get on your money might pale in comparison. And that could leave you with a shortfall.
Let’s say you have $10,000 to invest over the next 30 years. If you put that money into stocks at a yearly 10% return, you’ll end up growing it into almost $174,500. Play it safe with bonds or cash, and your average annual return might be 4% during that window, leaving you with just $32,000 and change instead.
How to minimize your risks as a stock market investor
You can’t completely remove the risk that comes with investing in stocks. But there are steps you can take to lower it.
For one thing, give yourself many years to invest. The 10% average annual return noted above accounts for the stock market’s good years and bad years over the past half century. If you invest over multiple decades, you’ll give yourself time to ride out potential stock market downturns.
Plus, you can minimize your risk by maintaining a diversified portfolio at all times. To do that, you could either load up on stocks across a range of different market segments, or you could simply buy broad market ETFs, or exchange-traded funds.
The 10% stock market annual return noted above is based on the performance of the S&P 500 index, which is generally considered to be representative of the market as a whole. If you buy shares of an S&P 500 ETF, you’re effectively investing your money in the 500 largest publicly traded companies. It’s hard to beat the simplicity and performance of that.
It’s easy to see why you may be worried about putting your money into stocks. But with the right approach, stock market investing can be a less risky prospect than you’d expect it to be. And it can certainly be less risky than putting yourself out there on TV for all of the world to see in the hopes of finding your soulmate.
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