With the Russian invasion of Ukraine, we’ve seen first hand how world events can affect the markets here in the United States. We’ve seen lots of market volatility since the beginning of the year.
But guess what? The market is always volatile. And the reason for that is many investors make all their decisions based on emotion. And by doing this they blur the lines between volatility and risk. Risk and volatility are not the same thing. In fact, they aren’t even remotely related.
What is risk?
To paraphrase the dictionary definition, risk is a situation involving exposure to danger. Pertaining to investing, I define risk as the chance of permanently losing your money.
What is volatility?
According to the dictionary, volatility is the probability for something to temporarily change rapidly and unpredictably. As it pertains to investing, I define volatility as the day to day up and down movement of stock prices.
What is a stock?
A stock, also known as equity, is a security that represents the ownership of a fraction of a company. I don't even like to use the word stock because I find most people view stocks as "risky." So from here on out I will say the best companies in the United States instead of the word stock.
Owning the best companies in the United States
Is there risk involved in owning the best companies in the United States? Meaning, do I have a chance of permanently losing my money? If you own the best companies in the United States, the only chance of permanently losing your money is by selling your ownership at the wrong time. For example, the price of owning the best companies in the United States is temporarily down 12% since January 1, 2022. If you sell your ownership right now, you would lock in a permanent loss of 12%. My advice would be, you don't want to do that.
If you own a house and the housing market were to drop by 12% would you call your real estate agent and list your home for sale immediately? I'm guessing you wouldn't do that because I think we can agree that would be crazy! It's exactly the same thing when you own the best companies in the United States. You wait for the temporary decline to be over with. Now that we know ownership of the best companies in the United States isn't risky, let's talk about volatility.
Is there volatility involved with owning the best companies in the United States? The answer is yes and there will always be volatility in any free market. That's exactly the way markets work. Again, volatility is the probability for something to temporarily change rapidly and unpredictably. Let's look at an example.
Here is a graph of how the best companies in the United States have performed since January 1, 2022. You can see it started the year at about $65/share and is currently at $49/share. Over three months that looks pretty risky.
Now let's look at the same companies five years ago. In 2017, the price was $32/share and is currently $49/share. That doesn't look risky at all when we zoom out five years.
Let's zoom out 30 years and see what it looks like. In 1992 the best companies in the United States sold for about $10/share. Today the price is $49/share! That's an increase of five times your money! That isn't risky at all!
The moral of the story is this: The riskiest day to own a stock is the first day you own it.
Time is the ultimate antidote to risk. The longer we own the best companies in the United States the closer our risk approaches zero. The markets will reward us for our patience if we just get out of the way and let them.
What does this mean to you?
The average retirement today for a nonsmoking couple that has reached age 62 in good health is 30 years!. Statistically speaking, one of you is going to live to age 90 and sorry guys, it's usually the ladies that outlive us. What I want you to see is owning the best companies in the United States long term is not risky. The real risk is in not owning them and somehow believing that you are being "safe" when in reality placing all of your money into a savings account paying you 1% or investing it all in bonds paying you 3% is the real risk.
We have well over 100 years of history showing that the real long term return of the best companies in the United States is 7%. Over that same 100 years we have seen that the real long term return of comparable bonds has been 3%. And still yet, over that same period of time we have also seen the increase in the cost of goods and services we live on increases 2-3% each year.
So if I know retirement could last 30 years and I know my cost of living will increase by 3% each year, what do you think would be the wise choice to invest a portion of our retirement money in for the long term? I hope you can see that the answer is clearly the best companies in the United States of America, also known as stocks.
You need a plan
A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you turn that money into something that could change your family legacy.
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