How you play the game is all important.
On a dark night, a mysterious stranger offers to flip a coin against you for money. You will double the stakes after each flip and play on until one of you is bankrupt. Who is taking the biggest risk?
If the coin is fair, you can both expect to win exactly half of the flips on average. So you're sharing the risks, right?
Wrong. What if you only have £100 in the whole world, while the Devil (well, who else hangs around on dark nights offering games of chance?) has a bottomless wallet?
Lucifer can afford an infinitely long losing streak. You, on the other hand, could be wiped out by two or three losses in a row. You are certain to go bankrupt sooner or later; all the risks are yours.
Being a smart Fool, you thank the Devil for his kind offer and make your excuses.
Time Really IS Money
The next day, you think about investing your £100 in the stock market. Your best friend, who knows about these things, warns you it's a 'high risk game'. Stay away. Stick to cash. Do you agree?
Your answer should be 'it depends'. The highest risk in a coin flipping contest is carried by the player with the shortest bankroll. And in just the same way, the highest risks in the stock market are borne by those with the shortest timeframe.
If you need your money back in six weeks, then shares are extremely high risk; no pundit, no expert, no guru can really tell you whether any share will rise or fall over a very short period.
But the more time you have, the less you need to worry about the day-to-day random twitching of share prices. Equities will always make you far richer than cash or bonds in the end. Why? It comes down to what a 'share' is in the first place.
Our society runs on profit. You may love this fact or loathe it, depending on your politics. But the profit element is what makes shares unique investments. Any other place to invest is a means of making somebody else a profit. Cash deposits are lent out by banks for profit. Corporate bonds provide financial fuel to business so they can make a profit. Property and commodities are the raw materials that businesses use in their hunt for profit.
The only investments that offer you, the private investor, a piece of those ultimate profits are shares.
"Hang on!" says your negative friend. "What about Marconi, Enron and Northern Rock? Some companies are so badly run that they vanish without trace. Time isn't going to be a great healer, there, is it?"
Quite right. Not every company survives. It's the flip-side of a competitive market. And if you're unlucky enough to back a doomed enterprise, then your cash will die with it.
The solution? Diversify. Hold as many different companies as you can. An index tracking ETF like DB X-Trackers FTSE 100 ETF (LSE: XUKX) is a great place to start: you can own every share in the FTSE in seconds. If one firm goes bust, another will boom to compensate.
Risk Depends on You
Is the stock market 'high risk', then? It all depends on you, the investor.
Taking a punt on Vodafone Group (LSE: VOD) with money you need in a few months is mega high risk. You might as well go to the casino.
Buying and holding a diversified portfolio on a twenty-year view is, arguably, lower risk than sheltering in cash. A bank account is all but certain to get eaten away by inflation over such a long time. Shares have made long-term investors richer over and over again.
Diversify well, and take your time. These aren't sexy bits of advice. They won't appeal to those who want fast money from nimble trades. But you don't have to play dice with the Devil to make money in the market.
The thing to remember is that shares are neither high nor low risk in themselves. It's what you do with them that counts.
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