Is Equity Investment Riskier?

Discussion in '401k, IRA and Retirement' started by Rainman, Jan 29, 2015.

  1. Rainman

    Rainman Senior Investor

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    I have a little money I'd like to invest. But I seek "assured returns". Looking around, I heard that equity investments tend to be riskier since a company may or may not make a profit. If they don't you earn nothing. If they make a loss, well . . .

    Now with buying stuff like government bonds, it's all different. You'll get your money back along with some interest. Quite obviously you won't make much money from that but at least it's guaranteed. What would you guys advice? Go with debt investments or take the other path?
     
  2. crimsonghost747

    crimsonghost747 Senior Investor

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    Depends on your personal situation. When do you need the money? Are you looking to profit or just fighting against inflation? How much do you have to invest?
    In general I would recommend you to go with shares of a steady company with a strong and stable history. Say... both PG and JNJ are quite low now after the quarterly reports. A lot of people like KO and telecommunications. As long as you don't need the money anytime soon (not within the next 5 years), the daily/weekly/monthly changes in value don't really matter.
     
  3. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Stocks are GENERALLY riskier than bonds, but offer greater potential for growth over the long haul. Most investors start out mostly or entirely in stocks when they are younger, and usually graduate to a mix of stocks AND bonds as they get older and closer to retirement. Most retirees want to keep at least a little in stocks, but will gravitate towards the generally less volatile bonds that provide interest income and "guarantee" of a return of principal for a good portion of their portfolio.

    Of course many stocks offer dividends, but dividends can be withdrawn by a company. Bond interest is "guaranteed" over the life of the bond.

    Benjamin Graham recommended a mix of anywhere between 25-75% in stocks and the rest in bonds. More aggressive investors should generally have a higher % of their money in stocks.
     
  4. owesem75

    owesem75 Well-Known Member

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    I believe that no company would want to make losses. The fact that they are listed in the stock market makes them transparent because they have to show their books to attract investors. If you think the company will do well in the next 20 years, then you make your decision only after checking the company record, how it is managed and the fundamentals. Nothing beats a good research and good financial literary to become successful in the equity market. Good luck!
     
  5. coloradogy

    coloradogy Active Member

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    As JR mentioned in a previous post, a stock that pays dividends a great choice. It's somewhat like a hybrid bond. It pays a percentage of its value out to the shareholders each year and has the potential to grow. Depending on the stock, your odds of getting a "guaranteed" return (read dividend) can be almost assured. Google dividend champions and follow the hits to a list of stocks that meet the definition.

    These are stocks that have paid a dividend AND raised it at least 25+ years in a row (that's close to guaranteed). Some have also had impressive growth. For example, $1,000 invested in Con Edison (Ticker: ED) in March of 1981 with dividend reinvestment would now be worth $75,500 today and pay over $3,200 a year in dividends (4.3% yield). I'll take that 13.4% YoY growth from 1981 and now a current return of 4.3% any day of the week.
     
  6. Corzhens

    Corzhens Senior Investor

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    It's loud and clear that government bonds pay no matter how small an interest. It is a much better investment that is slow and steady than something with a risk involved. What if you had invested your money in high risk investments and when you retire the company folds up? Have you heard of the educational plans that was a big issue some years back? Almost all those investment houses went bankrupt so those who invested had no money for the college eductation of their children. It was really tough on the part of those parents. Worse, the government was not able to do anything.
     
  7. norms options

    norms options Well-Known Member

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    It is true that government bonds are one of the safest investment choices out there, but in the business of investment, rewards are generally correlated with risk, so taking the safest road for the long haul may put you in a pretty bad position in the future. Sure you are going to get the return, provided the government doesn't default on its loans to the public, but if you are not at least matching inflation with your return, then you will have less expendable income in the future.

    I also do not recommend putting all of your investment in high risk vehicles. The key is to determine the amount of risk that is acceptable to you and then aim for that. There are no guarantees in life, so you have to take a little risk sometimes, but there are many strategies to mitigate that risk in investing. The main thing that you want to do is diversify. If you put all your money in one company and it folds up, then you do lose that entire investment, but if you put your money in a mutual fund or an ETF that contains hundreds of companies, then the odds that most of those companies will be successful are pretty good and can allow your money to grow over time.

    The other concerns when you are looking at what to invest in are the cost of owning the funds and taxes. You can easily find funds out there, especially ETF's, that have an expense ratio of less than .5% that will not eat away at your returns. As for taxes, I use a ROTH IRA so that you will not be taxed on the gains, and you will not owe taxes when you take money out. With a ROTH, your money is taxed before you put it in and then you let it grow tax free till retirement.
     
  8. Corzhens

    Corzhens Senior Investor

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    That risk in relation to the high earnings is what I fear. Our plan for retirement is just to build an apartment, rent it out and live a peaceful life. In living a simple life, you need not spend too much. Of course, there would still be the fun days of vacation trips and family gatherings but to a minimal extent maybe. In other words, expenses would be kept to a practical level (one that we can afford) and probably the rent will keep us afloat until our old age. I wish that our plan would work very well.
     

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