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Stocks Are Not Risky For Those Willing to Tune Out the Wall Street Mumbo Jumbo

January 30, 2012 · 62 comments

in Personal Finance

This post was written by Rob Bennett, who often writes about the pros and cons of index investing.  His bio is here.   I had the chance to meet with and talk with Rob during FINCON11, and his ideas are very interesting and thought-provoking.  I am happy to host a post of Rob’s on this site!

Investing is a pain.

You have to invest in stocks.  The returns provided by other asset classes are not big enough to finance a middle-class retirement.

But stocks are so risky! If you invest your money in stocks, you stand a good chance of losing half of it. Most of us cannot afford those sorts of losses. And most of us cannot bear the emotional pain associated with experiencing them.

We are stuck.


I don’t think so.

I don’t think stocks are risky. I think the idea that stocks are risky is a myth.

Your first reaction to that claim is probably disbelief. But I think that, if you hear me out, you may come to believe that the case is actually pretty darn strong.

The first thing I need to explain is why, if stocks are not risky, most people believe that they are.

The reason is that, for 90 percent of the history of stock investing, stocks really were risky. Index funds were not available until 1976. So, in earlier days, investing in stocks meant picking individual stocks in which to put your money. That really is risky. Make a bad choice and you lose your money. It’s that long history of riskiness that caused the belief that stocks are risky to become so widespread.

The second thing I need to explain is why the introduction of index funds pretty much eliminated the risk of stock investing.

When you buy an index fund, you are buying a share in all the companies that comprise the U.S. market. You will be participating in the fortunes of some companies that will perform poorly. There’s no question about it. But you will also be participating in the fortunes of other companies that will perform well. There’s no question about that one either. With index funds, it all balances out and you earn the return justified by the long-term productivity of the U.S. economy as a whole.

I can tell you what your long-term return is going to be if you purchase index funds at a fair price. 6.5 percent real. How do I know? That’s the long-term return that has applied for the overall U.S. stock market for 140 years now, as far back as we have records.

It’s possible that the number could be a little bit higher or a little bit lower on a going forward basis. But it’s highly unlikely that we are going to see that number change more than half a percentage point in either direction. So the reality today is that, if you buy index funds, you can know your long-term return in advance within a percentage point or so.

There’s not much risk in that, is there? Risk is uncertainty. If you know your return is advance, you are not placing your money at risk.

There is a third thing that I must explain before It can be said that you know all you need to know to make stock investing a virtually risk-free endeavor. The third one is the tough one.

If stock investing is virtually risk-free today, why doesn’t everyone know this? Why is the myth that stocks are risky remain so widely believed?

To explain this one, I need to point you to a column published by the Wall Street Journal a little ways back. The column observes that: “For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go…. It’s hooey…. They’re leaving out more than half the story…. Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s or the past lost decade on Wall Street.”

Yikes! It doesn’t sound like those words are saying that stocks are not risky.

Look closer, though, and I think you will see that really they are.

The people who are cited in the media as investment “experts” are almost all employed by Wall Street. Wall Street makes lots of money when you invest in stocks and hardly anything when you invest in other asset classes. So 90 percent of the “experts” are compromised. They are not experts in how to invest effectively. They are experts in persuading people like you to invest in stocks when it is not in their best interests to do so.

What if you tuned them out? What if you invested in stocks in the way that your common sense tells you should work rather than in the way that the experts advise?

Please note that I say above that index funds provide a long-term return of 6.5 percent when they are purchased at fair prices. They don’t provide a long-term return of anything close to that when purchased at the sorts of prices (insanely high prices) that have applied since 1996.

That’s what the fellow at the Wall Street Journal is pointing out when he says that Wall Street is leaving out half the story. Stocks are great when priced well and horrible when priced poorly. Just like everything else offered for sale in this consumer wonderland of ours.

Stocks are not risky. They are just a bad deal when priced too high. The risk of stocks is concentrated and easily avoided. Don’t buy stocks when they are insanely overpriced and you will never have to worry about losing your money in a stock crash.

There’s never been a crash of any consequence starting from a time when stocks were priced fairly. There’s never been a time when stocks performed well starting from a time when they were insanely overpriced.

It is the advice we hear from the investment “experts” on Wall Street that makes stock investing risky. Tune out the marketing mumbo jumbo and stocks will never again be risky for you.

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{ 6 comments… read them below or add one }

Financial Independence January 31, 2012 at 6:35 am

I do not think it is only risk – it is combination of risk versus reward. I have recently analyzed all “Big Oil” companies and when you take a hard look – you are getting about 1 to 0% above official inflation level, as far as the dividends go.
So because of the abundance of money in the stock market – compensation for the risk is not nearly as high as it used to be.


Miss T @ Prairie Eco-Thrifter January 31, 2012 at 9:40 am

I think like it has always been the stock market goes up and down and that we need to concentrate on the long term not the short term. Right now things have taken a dip but they will come back and rise again. Don’t let the current trends affect your long term investing plan too much.


Penny Stock Blog January 31, 2012 at 7:46 pm

What about buy and hold not forever but it could be for some time. Their are stocks like petsmart that traded at 2 dollars a share 11 years ago now the stocks almost fifty. Also pricesmart traded at about 7 dollars a share about seven or eight ago now its almost around sixty dollars. Their are many other examples Apple computer traded ar only 5 dollars a share in 1998 now its over 400. These stocks are being held quite a long time generally speaking I would say four to six years would be about right as far as buy and hold go. I have a website where I have been following stocks under five dollars. I generally hold my stocks anywhere form 2 to 6 years.


MyMoneyDesign January 31, 2012 at 9:48 pm

Nice article! There is a reason why index funds and Vanguard are so important – they work! Yes, no stock strategy is ever free of risk. And there will be many “experts” who are ready to tell you to hide your money under the mattress. But if you have any faith in our economy whatsoever, you’ll look to the future with some amount of optimism and see that values should rise over time.


Viola@PaydayLoans@ December 26, 2012 at 3:50 am

Investing is always risky but on the other hand it has lots of benefits. Probably it’s the best way to make your money work for you and bring you an income. Simple savings do not work, but for me it was always hard to understand where can I invest my money and take the lowest risk. I have heard that investing in stocks is very popular, but risky enough, nobody would like to lose the money. But after reading this post I got some things for consideration, probably investing in stocks really makes sense.


QUALITY STOCKS UNDER 5 DOLLARS April 2, 2013 at 1:34 pm

Its true nobody has ever made a penny investing in stocks if all they do is bailout at the first sign of a decline in stock prices. Stocks usually have a 20 to 30 percent correction every three to five years its the nature of the equities markets. Stock investing is not for everybody.


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