Investing in Stocks: A Guide to Assessing Risk and Suitability

Before you begin to answer the question, “Should I risk money in the stock market?” you should first assess your investment goals, needs and risk tolerance using this series of questions:

• What are my investing goals?
• When will I need this money? (Or: What is my investment timeline?)
• What is my risk tolerance?

The answer to the larger question about whether you should risk money could be “yes” for one person and “no” for another person in the exact same financial situation — same age, same goals, same income, same investment timeline. Some of us are just better able emotionally to handle risk than others and are more comfortable with the inevitable ups and downs of the market. Others of us would rather play it safe, even if that means delaying retirement or getting by with less (now or later).

It’s OK to say ‘no’

If the word “risk” is the one that stands out the most when you ask “Should I risk money on stocks?” it’s likely that you’ve already come up with an answer. You’re thinking of it as a risk, and it sounds scary. You need someone to talk you into taking the plunge. Here’s the thing: you don’t have to. It’s OK to say “no.”

There are plenty of investments that can help you grow your retirement savings (or whatever money it is you’re thinking about investing) without putting your principal at risk (at least, not nearly as much as stocks). With today’s CD rates, that money won’t grow quickly, but it’s a lot better than not saving at all. If you’re going to spend most of your time worrying about losing your money on stocks, maybe investing somewhere safer will save you costly stress. (Yes, stress costs you, both in health effects and in well-being, which has a long-term effect on perceived wealth.)

Historically, stocks outperform everything else

Yes, it’s true, the stock market is volatile. And it is possible to lose 20 percent, 30 percent or even your entire investment in one given stock (it’s happened to me) if things go horribly wrong. But you can hedge, or greatly lessen, that risk by investing in stock index funds or other widely diversified mutual funds. And, over time, stocks have held their value and grown even in the worst of times. You can pick a time frame of a few years that might show a great decline in a diversified basket of stocks, but if you pick a time frame over 10 years, it’s highly likely you’ll see modest growth — and in some cases the growth is eye-popping.

If you’re willing to wait long enough — 30 years is, for the record, “long enough” — you can be confident of receiving a stock market return that’s significantly better than bonds or CDs. (Of course, historical returns are no guarantee of future results; they do, however, give many investors far more confidence about future results.)

Say ‘yes’ if you have the time to ride out the ups and downs

If you have 20 or 30 (or more) years before retirement, and your risk tolerance is at least fair-to-middling, you may decide it’s worth the risk to invest in the stock market. Just about everyone will tell you to make sure your portfolio is diversified, so when you’re risking money, you’re not risking everything in one basket. But the thing about gaining wealth is that it does take swallowing some risk. You just need to figure out how much you can tolerate.

Sarah Gilbert

Sarah is a blogger by trade and a finance geek at heart. She cut her teeth on her first Excel spreadsheet full of financials at the tender age of 21, when she began her investment banking career in First Union's Loan Syndications group. She went on to get her MBA from Wharton, work at Merrill Lynch and fall in love with analyzing company strategy and endless rows of numbers.

She is a freelance financial and (award-winning!) literary writer, working in between baking bread and finding socks for her three little boys in her beloved 1912 Portland, Oregon, home. Sarah's even-more-personal blogging about parenting, food, biking, and life can be found at Cafe Mama.

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