My Beginner’s Understanding of Investing – Part 5: The Equity Risk Continuum

I have to admit, dear Reader, that this investing series has taken MUCH longer than I thought that it would. And I cannot help but feel bad for it coming out so slowly. I keep reminding myself that you’re all grown-ups and so are perfectly capable of researching this on your own if you’re desperate enough. I also remind myself that I’m trying to make this blog one of the few areas of my life where I am more focused on pleasing myself than others. But definitely a big part of this slowness is that I have been teaching myself while I go, which of course takes time. And then when I start writing up a post I have this annoying academic need to reference… but I have read so much now that I couldn’t ever find the references I was looking for when I was looking for them! So in desperation I spent the whole of last week cataloging everything that I thought was good enough to email to myself… and I was shocked to see how much I have actually read! I knew that I had learnt a LOT but I had no idea it was that much 🙂 Made me feel quite warm and fuzzy 🙂 And also built my confidence that I can actually make an informed decision with our money (and not fall victim to the Dunning-Kruger Effect!)

So let’s recap (so my pattern thinking brain can know exactly how everything is fitting together so far!):

We’ve already established that the investing is the tricky part. But hopefully now that we have the big picture about the different kinds of assets and how portfolios work we can start making some better-informed investing choices.

But before we go any further we need to speak some more about equities/shares/stocks and their continuum of risk. Based on here, here, here, here and here this is how I see the equity risk continuum:

img_3092-editted

We have all heard the saying not to place your eggs all in one basket, yes? Well that’s the logic behind making sure you buy equities in a range of companies – that way if one goes bust you don’t also necessarily go bust 🙂 Buying into companies that are established and have a history to prove that they work is also less risky than buying into a new or smaller company. Let’s be honest, even the people starting the new, smaller companies aren’t sure it’s going to work! The reason that regular, smaller payments are safer than one lump sum is because of dollar cost averaging. Basically, if you are buying regularly then sometimes you will buy high and sometimes you will buy low but over the long term it will all even out 🙂 It will also get you into the habit of regularly investing which is even more fantastic 🙂 Lastly, equities are for the long term. Equities do go up and down but from everything I have read (for example, here) over the long term they cannot help but go up 🙂

What this all means is that I can invest in equities (and so get the magic reward of compound interest and the much needed security of keeping up with inflation) and STILL choose a level of risk (and reward!) that I am comfortable with 🙂 Yay me 🙂

Xxx

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5 thoughts on “My Beginner’s Understanding of Investing – Part 5: The Equity Risk Continuum

  1. It’s nice to begin to understand the path to FIRE a little better, eh?? I do want to play devil’s advocate when it comes to dollar cost averaging… If you’ve got the lump sum, I err on the side of invest immediately. Because, at the end of the day, 20 years from now, it won’t matter nearly as much as it does in the present. The money will have been in the market, and will have grown. Remember it’s about, time in the market, not timing the market!

    Cheers!

    FM

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    • Hey! Thanks for stopping by 🙂 Completely agree with you – what matters is the amount of time in the market. However, everything I read said that even if you have a lump sum (which I don’t!) you should rather put it into the market over 3 or 4 months instead of one big lump sum. So I suppose the lesson is don’t spread it out too thinly – once you decide to join the market you should do so over a relatively short time and then continue to add to it regularly (if you can)?? Xxx

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      • Again, this just goes back to the long-term approach philosophy. In 20 – 25 years, it won’t really matter. So, why not just put the money to work all at once?

        I’m grappling with this decision myself as I save for next years Roth IRA contributions… Do I just dump it all in January 1, 2017, or do I spread it out over the next few months?

        Historically speaking, there will be a drop in the markets after the next president is elected (regardless of who). So, this factors into the decision.

        But, at the end of the day, I’m investing for the long run, so why not put my money where my mouth is and just toss it all in at once?

        I think this is a situation where I need to check my self, and my goals, and realize that present me doesn’t need to see short term gains, but that future me will appreciate the long term gains.

        FM

        Liked by 1 person

  2. Pingback: My Beginner’s Understanding of Investing – Part 6: My Choices | The Brat Experiment

  3. Pingback: My Beginner’s Understanding of Investing – Part 7: Passive Investing | The Brat Experiment

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