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Today, The Three Truths to Successful Long Term Investing Part 3
Have you hear the term, no guts no glory? Hi! I’m Zina Spezakis and welcome to Tonka Beans. If you saw our video on this is how your money grows you know that’s stocks tend to have much higher returns than cash and bonds, but why? One word, risks. Stocks have a lot more risks to them. The trade off between risks and return is one of the most fundamental things to understand in finance. The higher the returns you get on stocks is the compensation you get for the root that you bare. So, what is this risks I’m talking about? It’s basically the chance that the value of your investment will go down. There are armies of analyst who try to quantify the value of stock risks, I spare you there math. But you should know there are two types of risks. The first risk, the risk that it individual stocks price will fluctuate, this is called Stocks Specific Risk. For example, let’s say a company reports bad news about this profitability or operations “Hello, embezzling CEO” or anything that may affect the future ability to be profitable. The US auto industries are great example here.
Stock specific risk can be virtually eliminated if you have a well diversified portfolio like in the mutual fund. Think of it it’s not having all your eggs in one basket. The second type of risks, Market Risk, is a risk that the stock market as a whole, will drop. You can't eliminate it but it’s generally something that happens in the short term. Like in 2008 to 2009 for example. I know it could be gaunt wrenching to open up those monthly savings but I am here to tell you that if you don’t need the money you invested in the short terms say five to 10 years then stock are the best way to grow your assets in a long run. If you keep a long term prospective then swings up and down in the market are not much of an issue and you can save yourself the stress.
I’ve been investing for over 15 years, and I’ve had some down here especially in 2008. But I keep investing because I’ve got time on my side. Market risks and investment returns are attach at the hip. The potential for lost increases in stock, but so does the potential return. You get paid for taking on risks in the form of greater returns. Like I told you, no guts no glory, but here is the key. Risk is pretty much the short term thing. Most of the time in the end you’ll win, not that’s not to say there could be times where you can see your stocks dropped in value dramatically like October, ’87 or when the dot com bubble burst. The important thing to always remember about investing that’s you’ve must give it time. Time is your greatest ally if you can be discipline about periodically investing and staying in the market. In fact, let me give you an example let’s say your grandmother had a $1,000.00 to invest in small caps stocks after the crush of 1929. By 1995, grandma wouldn’t be setting on over $3.4 million not bad, what more real world the financially advice?
We’ve got a lot more to tell you here at tonkabeans.com. We also want to hear from you, so please join our community and become one of our opinion makers. This is been Tonka Beans, will see you next time.
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