Who does not take risks does not drink champagne

Why invest money?

The alternative would be to roll all the furs here and now, but instead, we put them on the stock exchange in the hope that they would sometimes make us even more money and allow for a bigger role in the future (if you want to spend money on it now).

So the money is invested because it is hoped to generate more money in the future. This money generated somewhere in the future is an expectation of a return on investment.

The downside to the return expectation is a risk. These two go hand in hand: the higher the risk, the higher the expected return, and vice versa.

The hard truth is that there is always risk involved in investing.

But what does risk mean?

Risk is an unexpected fluctuation in the value of a return, aka volatility. Risk is measured by the variation in the level of return. The more the curve, i.e. the market value of the company, fluctuates up and down, the more risky the investment.

Risk can be a good friend, but only if you know how to handle it right.

When you start investing, it’s a good idea to feel your risk tolerance. A person investing in the stock exchange should have the ice ready to be poured into a hat in the cold.

It would be best if you approach your investments with about as much passion as emptying the dishwasher. You do it because you know it will make your life easier in the future. However, you won’t lose your night’s sleep thinking about the order in which you would empty the dishes the next day.

And even if there’s a rush to work in the morning, you don’t start throwing plates on the walls hoping it would speed up the process.

But just.

Remember a long enough investment horizon

It is good to know this from the stock exchange: income is generated over time. The placement is a marathon, not a sprint (apologies for this shocking flatness).

The stock market has risen by an average of 8% annually for the past 200 years. Taking into account inflation, ie the decline in the purchasing power of money, the return has been 6%.

The last 200 years have seen heaps of stock market crashes, financial crises, and bubbles. After each crisis, stock prices have recovered and still risen above what they were before the collapse.

Even if the monthly or annual fluctuations are large, a higher-risk investment should generate higher returns than a lower-risk investment in the sufficiently long term.

Because of this, you shouldn’t let the sensational stock market crash news affect your life too much. When investing in the stock market, you are confident that even if the near future looks turbulent, things will be even better in the distant future.

Therefore, remember a long enough investment horizon. Since we can’t say for sure what will happen in the future, make sure your investment portfolio is well diversified.

Manage risk by decentralization

When you place in a distributed way, you don’t put all the eggs in the same basket (sorry again…). So you don’t just own one company or industry, but several.

As you have read so far, for example, you may have wondered what if a high-risk company goes bankrupt and you lose your entire investment. Where is your expected return then? This is where the core of decentralization comes from. When you decentralize effectively, you protect yourself from the bad success of an individual business.

An easy way to diversify your investment is to invest in funds. Therefore, fund investment is considered to be lower risk than holding direct shares.

Inactive funds, someone else, hopefully, better informed, has already made choices about companies and sought to diversify risk. In passive index funds, the fund’s return aims at the stock exchange’s average return. 

The risk can also be diversified over time. Temporal decentralization is achieved, for example, through monthly savings. When you buy fund units monthly, in one moon the fund is more expensive and in another cheaper. This means that you don’t always happen to buy a fund when it’s at its cheapest, but on the other hand, you also don’t when it’s at its most expensive.

This works because, at a given point in time, it is never possible to know with certainty at what point that curve is going. It can only be looked at afterward, but then it is already too late to buy or sell.

That’s it! I tried hard not to stop this posting with some dilute saying about how just by taking a risk you can achieve all your dreams.

But then I remembered this diamond that a friend of mine has said his father said:

He who does not take risks does not drink champagne. Cheers!

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