Risk (not the game)

You know, I frequently hear people talk about their investments in these terms: "Oh, I couldn't possibly tolerate losing money. I have my savings/retirement/investments in bonds and savings accounts." Since I work in a female-oriented field, these comments invariably come from women, and invariably those women are in their 30s and sometimes even their 20s. And it drives me crazy.

I am not an ultra risk taker; I've given up my dreams of skydiving and rock-climbing. Nevertheless, investing in the stock market and taking the risk of buying a stock that might go down -- very low in the risk factor, in my opinion. I want to ask those women -- have you ever bought something with a credit card and not paid it off at the end of the month? They will probably say yes (who hasn't?). Well, I want say, you've lost money to the tune of 15% and possibly 22% and 30%. Yesterday the stock market took a downturn and it caused my total losses on my stock to hit 10%. Yes, I recently bought stock with an IRA I didn't expect to have (and therefore use for "playing") and yes, I've consistently lost with these stocks. Do I care? Not really. Sure, I'd love to see my money grow, but I don't expect to sell tomorrow, and all the stocks are fairly risky. They have, in the past three months, gained 10% and lost 10%. I'm not worried about now -- I'm pretty sure that each and every one of them will still be around in 10 years, and I'm also sure that they will have gained by then. And that is all that matters.

Sure, Wild Oats might go out of business, and solar technology might flop. Those are possibilities. And if they do, I stand to lose money. But I think about this; during my college years, I paid over $2000 in interest on my credit cards. I pay nearly $700 in interest every month on my mortgage. From a logical standpoint, I am losing money hand over fist; but then again, I'm not. All choices have some sort of risk involved; buying a home over renting, using a bank rather than my mattress for my savings, using my mattress rather than my bank for my savings. I only wish I had more money available to invest in what looks to me like a sale.

I'm not the only one; market analyst Donald Luskin agrees with me, and I enjoyed his article: Market Correction Makes Stocks More Attractive. All I could do when I read it was cheer, and I just wish that more women would be willing to take risks -- with their money, and with their lives, too -- for the great returns they can get from it.

And I never want to forget one fundamental truth about investing: No matter what, stocks always have a positive expected return.

Stop for a minute and think about that seemingly simple statement. It's actually quite profound, and it's something that most investors have never really thought about consciously.

If markets are at all efficient, then risky securities like stocks must be priced so that the people who hold them — the people who take risk — will get rewarded for that risk-taking, at least on average. If the fundamentals get worse, then stock prices will fall so that from their new low level investors will still have a positive expected return.

Yes, that's an argument for always holding stocks. But believing that argument doesn't make me a perma-bull. It just means I think that over time I'll get rewarded for taking risk.

Markets aren't always perfectly efficient, nor are they perfectly right. Sometimes the risks in the world aren't fully appreciated by markets — or at least the risks I think are out there aren't. Then I'm bearish. Sometimes the risks in the world are overemphasized — or at least the risks I think are out there are — and that's when I'm bullish.