“Risk comes from not knowing what you are doing.” Warren Buffet
Taking risks in life is necessary. Be it in investing in the stock market, driving a car on the road, taking your regular medications, or getting married to a woman you love.
The safest way to keep your money is of course put them under the pillow. The problem of doing that is the money might be stolen or you would eventually lose the purchasing power due to inflation.
Investing your money in whatever vehicles- ETFs/index funds, individual stocks, real estate carries certain risks but you have to be mentally prepared for the risks involved.
You have to take calculated risk
When I was a primary 3 student back in Bukit Tambun, there was a big abandoned mangosteen plantation beside my classroom.
Teachers taught us about the importance of a balanced diet and reminded us to take fruits regularly.
An apple was sold at MYR 0.10-0.20 per piece back in the 1980s. I had MYR 0.20-0.30 every day given by my mum to buy food during recess.
Apple was certainly out of reach for me after getting my favorite fried noodles in school at MYR 0.30.
I loved to go and collect the mangosteen just beside my classroom to supplement my diet. The horror story of some students bitten by deadly snakes told by my teacher kept us far away from the plantation.
Learn before you jump
As a 10-year old kid, I was puzzled since I had never seen a person bitten by a snake before in my whole life.
After spending 1 week looking out the window to the mangosteen plantation, I never spotted a frog let alone a snake. ( My grandmother used to tell me snakes loved to eat frogs and if you couldn’t see a frog, unlikely you were going to find the snake!)
I knew it was very unlikely I would be bitten by a snake and the reward of eating free mangosteen was just too tempting.
After one week of careful observation and consideration, I went out to the plantation and collected a few kilograms of mangosteen to share with my school pals.
Is there any risk in the stock market?
Yes, there are 101 risks if you invest in the stock market! Even though putting your money in a broad market index such as ETFs, it is not a 100% safe bet.
The market is volatile but you know from historical data that,
- the stock market is the most powerful wealth-building asset beside real estate
- the longer you hold your equities, the less likely you are going to lose money
- the longer you keep your money in cash, the poorer you become due to inflation
- no matter how volatile the market is, it always goes up in the long term
I want my money to work hard for me
By putting 100% of your money in the bank, you are actually enriching the bank and not yourself.
To achieve your financial independence, you have to follow these three steps,
- Earn and maximize your income
- Spend less than what you earn
- Invest and grow your money
” Market is going to crash!”
” Recession is coming!”
” Don’t buy now, wait for another 6 months!”
” The world is going to end, Vanguard and your brokerage firms might go bankrupt soon!”
People around you would tell you these kind of bad news all the time.
There are a few psychological principles we all must follow if we would like to live a meaningful life.
Life is full of uncertainties and challenges, taking risks is essential
If you want to stay safe all the time, keep yourself at home but that is not the true value of staying alive! Go out to explore the World even though you are taking risks of catching an infection, being knocked by a car on the road or being robbed in the bank.
Don’t focus on things you can’t control
You can’t control the market direction. No point arguing whether Apple ,Facebook, Delta Airline or Airasia would survive the next crisis or not because these are all out of your control.
How much you can save and what you can invest are the things that you can control! Stay focused on your strategy and ignore the noises!
Conclusion
Taking risks is part and parcel of everyday life. Investing in stock market is of course risky if you do not know what you are doing.
You can mitigate the risks in the stock market by
- buying a mixture of broad market indexes ,and
- holding them for the long term!
