Some Of The Riskiest Investments May Surprise You

One of the biggest fears people have when it comes to investing is a year like 2008, when the US stock market fell almost 40%. But as long as you didn’t bail out of stocks, you would have recovered your losses in about 5 years and then gone on to make more money. The same is true of every other market downturn since the Great Depression. If you’re worried about the real risk of permanent loss, some of the riskiest investments actually seem much safer. Here are ones that may surprise you:

Cash

Cash is indeed a pretty safe “investment” in the short term but in the long term, it practically guarantees the loss of purchasing power. That’s because savings accounts and money market funds are generally paying less than the inflation rate so the real value of your money is slowly decreasing over time. If you hold physical cash under your mattress, you also face the risk of losing it due to theft or a disaster like a fire or flood.

Tip: Use cash for short term goals within the next 5 years but include more aggressive investments like stocks and real estate to keep ahead of inflation for longer term goals.

An Individual Stock

Remember what I said about stocks always recovering? That may be true for the market as a whole but any individual stock can go to zero and never recover, no matter how good the company is and how well the stock has performed in the past. Your company stock can be even more dangerous because your job is already tied to it. The last thing you want is to see your nest egg devastated at the same time that you’re out of a job.

Tip: Never have more than 10-15% of your portfolio in any one stock, especially if it’s your employer.

Your Home

Cash may under-perform inflation and an individual stock can go to zero but your home can cost you everything you put into it and then some. If you put a 10% down payment on a home and its value falls 10%, you’ve just lost 100% of your equity. That’s why real estate doesn’t need to fluctuate as much as stocks to be even more risky. In addition, you may have to shell out thousands of dollars in maintenance and repair costs and the lack of flexibility can cost you job opportunities that are too far away.

Tip: Before you buy a home, make sure that you can really afford it and intend to keep it for at least 5 years.

When you think of risky investments, you may not think of cash, a stock that has been performing well, or your home but the fact that these investments appear safer than they are only makes them more dangerous. Don’t get me wrong. Each of them can make sense in the right circumstances. Just make sure you understand all the risks before you buy them.

 

 

 

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