Taking risks can be unsettling. You may have sleepless nights, and your stress level can skyrocket.
Although there are many risks you should avoid no matter what, such as betting it all on the horses, your decisions about whether to take other risks -- like such as skydiving or starting a business -- might depend on your personality.
Then there are the smart risks. Before we get into what some of those smart risks are, let's look at exactly what risk is.
Risk is the possibility that the unexpected may happen, and it typically implies a negative outcome. It's the chance that something's going to go wrong and end badly.
Nobody wants unpleasant surprises, but avoiding some of these risks could actually leave you in an even riskier position. Two of these risks worth taking are investing in the stock market and staying in the market as it goes down.
With all the market's ups, downs and constant turmoil, investing can be scary and seem like a sure way to lose money. However, if you don't invest, you are choosing instead to run the risk of inflation.
The risk of inflation is the possibility that prices will rise, driving down the purchasing power of each dollar -- which means your money will buy less and less as the years go on. In contrast, the stock market tends to outpace inflation over the long term, allowing your money to grow faster than inflation. This allows you to maintain your buying power.
Without investing, your money probably won't be able to keep pace with inflation, so instead you must save more for retirement. However, once you reach retirement, you may find you still don't have the money to cover your expenses -- because you weren't taking enough risk to offset inflation.
The second risk has to do with staying in the market when it is on one of its rides down. It is natural to want to jump out of the market when it's sinking. Yet when you get out of the market, you run the risk of missing out on the run back up. You also end up costing yourself more in fees -- especially if you are going to be buying back into the same stocks or funds.
While you think you might lose it all, the risk of not being in the market when it goes back up is worse than staying put and seeing the market go down a bit more. Look at it this way: If you are invested in high-quality stocks across the market, what is the chance that all of them are going to zero? Conspiracy theories aside, the market will come back up -- you just need to be patient.
How do you get over the emotional roadblocks so that you can take these two risks that will ensure that you have a more solid financial future?
The first thing you need to do is educate yourself. When you understand the stock market and the risks associated with investing, they seem a lot less risky.
Secondly, go slow. If you're intimidated by the stock market, don't run out today and put every single penny you have into the market. Get into the market slowly while you're educating yourself. You may soon realize that the risks aren't nearly as bad as you thought.
Finally, to reduce your risks, make sure your investments are diversified. When you have your money spread across many different stocks, the amount of risk you are taking with any one stock is lower. Just as you wouldn't bet all your money on one horse, don't bet it all on one stock.
The Investing Answer: Market risk is scary, but the downside is even worse. Take the time to educate yourself about investing in the stock market and start making your move.
