When you hear people say that stocks are risky, it’s often because of the volatility of stock prices. That is, you could buy shares of Royal Bank of Canada (TSX:RY)(NYSE:RY) for $78 today, and it could fall to $68 in a few months.
If that happened, an investment of $1,000 would fall to $872. However, there is a way to lower the risk of investing in stocks–buy them when they have dipped and are discounted.
Unfortunately, some investors become greedy and buy more when share prices rise and become scared and sell when share prices fall. So, it’s actually the people behind the stocks that make the act of investing risky if they act irrationally.
Reasonable investing
One way to invest in a reasonable manner is to buy quality stocks with a long time horizon when they’re priced right. After all, you don’t overpay for groceries. Why should you overpay for stocks?
At $78, Royal Bank is fairly valued and offers a decent 4.2% yield for starters. It is a quality business and is the leader of the Big Five banks with an S&P credit rating of AA-.
Just because you buy a company at a fair or even discounted price, it doesn’t mean that your capital is safe. Any investor could have bought the bank at a fair price of about $48 per share in 2008. However, during the financial crisis of 2009, Royal Bank fell to as low as $25 per share, a 50% fall from its 2008 high!
By buying shares in a company, you own a piece of it. If you buy quality businesses such as Royal Bank, it doesn’t make sense to sell the shares when prices fall. In fact, the lower the price falls, the less risky it is to invest because you’ll be paying less for more.
What’s risky?
The real risk comes with selling at a loss or selling your shares for less than they’re worth. For example, risk occurs when an investor isn’t able to hold on to their piece of Royal Bank and sells it when it falls 50%.
Additionally, the real risk occurs when people can’t maintain their lifestyle during retirement because they didn’t save enough. Unfortunately for many people, merely saving is not enough.
By investing properly–safely investing in a style that suits you–you can get your money to work for you, so you’ll have more than enough for you and your family.
Conclusion
Investing in stocks isn’t risky. It is the investors owning stocks who can act irrationally and make the act of investing risky. If you buy quality companies when they’re fairly priced or discounted and hold them for a very long time, you shouldn’t have anything to worry about.
