Thursday, 26 May 2016

Someone told me stocks are risky



Someone I just met today started a conversation with me.  We got onto the topic of the stock market.  He flat out said that stocks are risky, it's pure gambling.  He gave me the example of how someone told him to buy Royal Bank stocks because it was a great bank stock and a great company overall.  I started to like this conversation with this person, whom I'll call A.S.  well A.S. said that he bought 200 shares of RY.TO at $80 for an investment of $16,000 and then it dropped to $69 for a loss of $11 times 200 shares for  total loss of $2,200.

There is a way to lower the risk of investing in stocks, that is to buy stocks when they have fallen in price which is discounted in a way.

Unfortunately, most investors become greedy and buy stocks when they rise and become scared and sell when share prices fall.  Shouldn't it be the opposite if you want to a successful investor?  So if go back to the scared investor selling, isn't it the people behind the stocks who sell that is making the act of investing risky if they act irrationally.

Reasonable Thinking

Remember the saying, "buy low, sell high"?  It's so true, why do people do the opposite?  When you do the opposite, you are locking in your losses and therefore you have realized the risk.  People who hold stocks in downturns because they know the stock will rebound are the most successful investors out there.

One way to invest in a reasonable way is to buy quality stocks with a long time horizon when they are priced correctly on a dip.

So going back our example with A.S., his friend who told him Royal Bank stock was a good investment, he forgot to say for the long term.  Royal Bank at $80 a share was fairly valued, the dividend would have been a decent 3.90%.  It is a quality business which raises its dividend on a regular basis.  Is a leader among the big 5 banks.  All good traits of a solid business.

Your investment is not completely safe even when you buy a quality company at a good price.  There was a moment in time that even Royal Bank dipped down to $48 or even $25 during the crisis in 2008. Now if you bought then, you would be very happy with your investment.  Goes back to buy low sell high which a lot of investors forget.

Risk

The real risk comes when you sell at a loss or sell them for less than what you paid for them.  Risk happens when the investor can't hold onto Royal Bank shares when it falls to $48 a share.  There is no need to sell quality companies that have a downturn,

Final Thoughts

Investing in stocks isn't risky.  It is the investors owning stocks who can act irrationally that make the act of investing risky.  If you buy quality dividend stocks for the long term, you should not have anything to worry about.  When there is a downturn, you still receive your dividend just as when there is an upturn, you get your dividend.  Remember buy low and sell high.  That statement still works after all this time.