How risky is the stock market?
By Mike Narouei, Content Producer at Boring Money
9 May, 2018
How much could I lose? Isn't it just for people who like a bet? We tend to really overestimate the risk of investing, especially over the longer term. We go through the facts for a 'spicy' portfolio over a 12 month period - the most you could have lost compared to how fast your cash is losing value (damn inflation). With a picture, promise.
The one thing we know about stock market investment is that it’s risky, right? That’s why so many people avoid it.
The view that you should never invest more in the stock market than you can afford to lose is persistent. And who can afford to lose money? But how much are you really likely to lose – 50%? 100%?
The way the graph-pointing men in grey suits talk about risk, it might as well be a meteorological chart or the flying velocity of an African swallow. What does it mean for a regular person? Are we jumping out of planes here, or just driving to the shops? Eating a chilli in a packet from Sainsburys or chancing some vegetal weapon from Brixton Market with a skull and crossbones on the label?
Things to consider
When City types talk about ‘risk’, they mean volatility. This is not strictly the chance of losing money, but the amount your investment bounces around. Stock markets bounce around, no doubt about it, but this only matters if a) it doesn’t recover or b) you have to sell before it has a chance to recover. So your time frame matters. Don’t invest if you’re likely to need the money within 4/5 years. Any shorter time period, you might get lucky, but you don't have time on your side to sail through the tricky times and wait for the turbulence to stop
Since markets began, over any 10-year period stocks and shares have done better than cash nine times out of 10. Those aren't bad odds. More to the point, over the past 10 years, you have lost an average of 1.3% per year by holding ‘safe as houses’ cash. This is because inflation has caused the value of your money to fall. So the stock market has made you money, and cash has lost you money. This challenges the perception of the mega-risky stock market and super-safe cash.
Worst case scenarios
Most people want to know the most they could lose. What has been the worst-case scenario with some of the DIY investing brands?
Say you had invested £5000 in a 'spicy' risk portfolio with any of the eight major online investment services called robo-advisers when the market was at its highest point over the 12 months to 31st March. Say you then sold out on the very worst day, the most you could have lost by month’s end would have been £283 of £5000. Admittedly, that’s quite hurty, but it is literally the worst case scenario. Over the entire 12 months all of these portfolios increased in value and the best-performing made £194 from a £5000 investment.
But, you may argue, the past few years have been good ones in the markets. And yes, there have been some disasters. Yet, it is worth remembering that since 1997, we’ve seen the technology bubble, the global financial crisis, wars, pestilence and Donald Trump. Yet someone who had invested £100 per month in the stock market would now be sitting on a pot of around £35,500. The cash investor would have just £25,500.
If you think it’s worth a try, visit our Best Buy tables to see what other new investors say about various popular providers. There’s even a Beginner Investor filter you can tick! No bubbles. No jargon. No fake guarantees. Just smart independent advice for people who don't own super yachts and haven’t got a degree in Economics.