Investment Risk

All investments carry risk, be they stocks (business failure), property (buildings depreciate, land can become degraded), or government bonds (inflation).

In addition stocks and property are subject to market fluctuations which can be sharp, large and unpredictable. This is a fact of life, to be accepted as such if you are to invest in stocks and property.  Market fluctuations can also be an opportunity if you have money available.

“We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” Warren Buffett

Risk isn’t the same as volatility. Rather risk is the chance of a permanent loss of capital from overpaying or overestimating a company’s prospects. Price fluctuations sort themselves out over time, and “true value” always surfaces.  

Importantly, while market price fluctuations are inevitable, remember that the dividend income paid by stocks generally stays stable and increases over time. You can live comfortably with price fluctuations if you know your dividend income is not affected.

“Most companies pay consistent dividends, generally trying to increase them annually and cutting them reluctantly.”  Warren Buffett

Nevertheless, you shouldn’t own stocks if a sharp decrease in their price in a short period of time would cause you acute financial or emotional distress.

Maintain a common sense attitude to risk. Your home also fluctuates in value, and it’s normally not a problem. Most people starting out stretch to buy the most expensive home they can afford, and finance the bulk of the purchase price, so they are really exposed.

So called “safe” Government and corporate bonds, bank deposits and other “interest only” investments return only their nominal capital, with its purchasing power eroded by inflation, currently around 2% per annum in Australia.

 “An investment that can’t beat inflation is useless. Only gains in purchasing power count.”  Warren Buffett

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Warren Buffett

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