Should You Risk The Stock Market?
The economic climate of the early 2010s is worrying to say the least. Gloomy headlines and stories stare out at us from our newspapers and TV news channels every day. So with all that’s going on, should you be investing in stocks and shares?
The case for investing in the stock market
The bottom of any dip in share prices is the best time to invest, as here you can buy your shares at the cheapest price and see their value rise. Unfortunately predicting exactly the lowpoint of any dip is very difficult, if share prices are low, will they fall further or begin to rise? But the most successful investors are often the ones who can correctly predict the way the markets will go.
The media may be full of gloomy news on the economic front, but some of the world’s emerging economies have continued to grow. Investing in the Far East or Latin America for example must still be considered a high risk investment, but it could also result in the value of your funds growing massively.
There is still a wide range of stock market investments available, and there is likely to be one that suits you somewhere. You can invest in funds that specialise in almost any region of the world, or in many industry sectors. If you are worried about the volatility of your investment, look for a cautious managed fund or similar investment services.
Investment in stocks & shares should be considered as a medium to long term investment. This means that short-term fluctuations in prices should not cause undue alarm provided the long-term trend of the value of your investment is upwards. The value of your investment may have fallen over a short-term period, but in reality this is only a paper loss. Which is better – to cash in your investment now, in which case you will definitely lose out; or to leave your money invested in the hope that the value will rise again? Over any 30 year period in history, the stock market has always yielded better returns than deposit accounts.
Should you decide to invest in safer areas, such as deposit accounts, due to the economic worries, your capital will indeed be protected from falls in value. But interest rates on these accounts are often very low at present, meaning your returns from these products could be very low, and given the current rate of inflation, the value of your funds could well fall in real terms.
The case against investing in the stock market
We truly are living in very uncertain times. In the past decade alone there have been several major events that have caused significant falls in share prices, such as the 9/11 attacks, the 2008 banking crisis and the debt problems experienced by several countries in 2011. No analysts can predict with confidence that further stock market falls will not follow the most recent of these slumps, and it is very difficult to know which region of the world will experience difficulties next. Some of the eurozone economies such as Ireland, Italy, Portugal, Greece and Spain have experienced particularly severe difficulties recently. Faced with a daily diet of worrying news stories, it is totally understandable that many people do not wish to invest in risky areas.
Investing in high-risk areas is even more risky if it involves your pension fund and you are close to retirement. If your pension fund falls due to a fall in share prices, it may be well after your retirement until it recovers, and then it will be too late. Hence it is normally recommended that while there is nothing wrong in principle with saving for retirement via higher risk areas, that you move your fund into more cautious investments as you near retirement age.
You should never invest all of your capital in risky areas – you should always retain an emergency fund in a deposit account or similar. Before deciding on a course of action, you must decide what your capacity for loss is, i.e. you should not make an investment if you would be likely to suffer financial hardship if that investment performed badly. Direct investment in the shares of start-up companies might be amongst the most risky investments, with the investor incurring the risk of almost total loss of their funds, and this should not be done if you would suffer financial hardship in these circumstances.
