There are no guarantees with investing. Well, I guess I can almost say there are guarantees with federal bonds, but that’s about it. FDIC insured CD’s, too. That’s about as close as you can get.
With anything else, the value can rise and fall sometimes, drastically. No one…no one…knows the future.
I think this is something that is hard for a lot of people to grasp. Because Fund X has earning 11% the past 5 years, it very well may not this year.
For example, you’ll often see the disclaimer “Past performance is not a guarantee of future performance.” That’s absolutely true. It is always true. Any particular investment can lose money. Any index can lose money. Any method or technique can lose money.
We are used to a lot of things that are more cut and dried. When you go to a store, you pay a particular price, and you get a particular thing. Investments aren’t the same way. No one can see the future and so no one really knows what’s going to happen and how investments will perform.
I remember at one of my first companies, many of us started around the same time and started in to the 401k at the same time. And it was a bad year, I believe one of the more aggressive stock funds lost 30%. People were asking, “Why are we doing this?” Unfortunately, I suspect some learned the wrong lesson, and stopped investing, or invested in overly conservative assets.
I remember a radio station that had a report on the stock market for the day and cynically called it “The Legalized Gambling Report.” That’s too bad. It sets a really negative expectation. Investing and gambling are not the same. With gambling, on average, over time, you lose. With investing, on average, you win. You don’t win every time. And in some circumstances, you could lose repeatedly. But it’s pretty unlikely, if you’re diversified and stick with it.
Be careful not to judge the concept of investing by single instances that went well or poorly. Some investments won’t do well in the short term.
So we want to think somewhere in the middle here. It is important to take some risk, buying stock funds, because over the long run, stock funds get the best return. But is important to diversity to balance the risk, both by having a broad stock index, and balancing with bonds, which have lower return but less risk.
Being too conservative, and buying all bonds, CD’s and such, feels safer, but in the longer run has a much lower return, and most likely we’ll end up behind.
Being too aggressive, buying all stocks, perhaps even “hot” stocks, is risky. You may do well with some. But there is a substantial possibility that you’ll lose a lot of money, perhaps very quickly.
What we’re looking for is improving our odds of having a decent return, but also lower the odds of losing money.