The REAL Risk to Your Investments by Richard Stooker

The REAL Risk to Your Investments by Richard Stooker

What is your risk when you make an investment?

Most likely, the first thing that came to your mind is, "losing money," but we need to be more specific than that.

You feel as though you've lost money when the resale, market price of your investment goes down. And the farther and faster and more often it goes down, the more you feel as though you are or could be losing money.

Those up and down swings in price are known as volatility. According to most investing books and advisors, volatility is the same thing as risk.

I dispute that.

Here in the real world, when you think of risk, I bet you think of words such as: danger, harm, poison, hazard, warning, dismemberment, and other such "fun" stuff. The word risk implies a possibility of substantial harm, even death.

From the standpoint of a business, real world risk consists of things such as: product failure in the marketplace, losing market share, competition, lawsuits, reduced demand for goods and services, increase in accounts payable and even bankruptcy and hanging up the "Out of Business" sign on the door.

In theory, stock price volatility does seems to relate to this definition of the word risk. Because if a company's business goes downhill, it's only natural the stock price will also decrease.

However, volatility also swings to the upside. In fact, stocks that rise the highest in price the fastest when times are good also tend to be the stocks that go down the lowest the fastest when times are bad.

And we also know that much of a stock's price movement has no or little relationship with the underlying business. Stocks go down because the Federal Reserve raises interest rates, because a vice-president has to sell some stock to pay for a divorce, or simply because on that day there're just more sellers than buyers.

But quite often this has little or no connection to the long term business interests of the company involved.

When stocks rise or fall because they meet or fail to meet earnings predictions, that does have a tenuous relation to the company's business prospects (because earnings are certainly important), but a company is not on the verge of bankruptcy just because the analysts overestimated its next quarter's earnings. There've been many examples of stocks that fell in price -- not because the company failed to make a decent profit (it did) -- but simply because the profit failed to be quite as high as the analysts had predicted.

Investors attach too much importance to volatility because they buy and sell too much. Once you buy some stock, you should plan to hold on to it until a quarterly stock dividend check bounces, the CEO is led away in handcuffs, or Warren Buffett's favorite holding time ("forever" or -- as some would put it -- until H*ll freezes over) elapses -- whichever comes first.

When you buy a stock or other investment for the income it provides to you, you don't need to worry about the "risk" of volatility. The price can jump up and down all it wants to so far as you care -- as long as you continue to receive your stream of income.

Then you need to be concerned only about "real" risks to your investments, such as products becoming technologically obsolete, too much competition from other companies, or going out of business for any other reason.

Copyright 2007 by Richard Stooker

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