Why Playing it Safe is Risky
Do You Like Losing Money?
That's what most people who are investing are actually doing, because they're afraid to lose money.
I meet and speak to people all of the time who are either really conservative with their investments or people who claim they are aggressive, but then can't handle the fluctuations in their portfolio, because they only like the upside potential of aggressive investing.
There are two certainties with the market:
- It will go down
- It will go back up and so far it's always continued to go up more than it goes down
By investing in too conservative a manner, especially when you have a very long time horizon, you are basically guaranteeing the fact that you are going to get returns that are lower than what you could - and in my opinion - should be getting.
What's the Difference?
The difference is absolutely massive. Now I don't know what the market is going to do in the future, but it's a fair assumption for me to say that a Moderate Conservative portfolio should return somewhere in the range of 4.0% over the long-term and a Moderate Aggressive portfolio should return somewhere in the range of 7.0%.
If you invest $500/month for 30 years, the Moderate Aggressive portfolio would be worth $260,000 more. You have to start learning that by playing it safe, you're actually LOSING money. Now, if you decided to play it super safe and try and save for retirement by buying a bunch of GICs, well you basically just "Guaranteed" that you're going to have a terrible retirement, unless you have the ability to save thousands of dollars a month.
I understand your fear
We have all heard horror stories about investing. Almost everyone I talk to has lost money in the stock market at some point or another, especially if they're a little older. But, they never had to lose money, they just made a choice to lose money.
What do I mean?
People only lose money in the stock market when they do one of two things:
- Sell when the market is down
Everyone can avoid the gamble. I know the idea of hitting it rich is awesome, but in order to make good, consistent money in the market, it's going to be a long process. Don't buy individual stocks with the hope that you're going to make it big. Don't ever put all of your eggs in one basket and never buy a mutual fund or a stock off of an advisor who is selling it to you because it had record returns the year before. If that's the crap your advisor talks to you about, fire him or her today and move your money. I will tell you a million times if I have to, not one person on this planet knows which stock or fund is going to do better than the next. How would they? I can assure you that if your guy was that good, he would never bother talking to anyone.
If they're so sure about risking your future, ask them if they're willing to mortgage their house against it.
Next, learn not to panic when the market drops. I know it sucks when it appears that you've lost money. I know it's easy to blame an advisor and move on to the next guy, but if you're invested in a well-diversified, low cost portfolio, it WILL go back up. It always does. The only time you actually lose money is the moment you sell.
I always ask clients this. If your house, which is worth $400,000 today, dropped to $200,000 tomorrow, would you sell it?
Of course you wouldn't, because everyone understands real estate and understands that your house is now undervalued. You'd probably be thinking about buying a rental property if that happened. I know I would.
So why is the market different? It shouldn't be, but it is, because people don't get it and are afraid. The real truth is that the stock market usually crushes the real estate market and it's way safer, but people think it's the exact opposite.