You Make Money in Stocks Because Sometimes They Go Down

by Kristen Euretig, CFP® Founder & Chief Planner

I attended an event this week in Manhattan on alternative investments and the speaker opened with a bit of a word game: “I make money investing in stocks and sometimes they go down” read the sentence projected on the screen to about 25 financial advisors from around the country on the 65th floor of a high-rise by Grand Central.

The speaker asked how we would change one word in the sentence to make it more accurate.  Someone suggested changing “stocks” to the markets at large since not every investment is a stock.  Someone else suggested changing “and” to “but”.  When the presenter moved to the next screen, the word “and” was replaced with “because” so that it read “I make money investing in stocks because sometimes they go down.”  

The point was that an asset that has a potential reward comes with a built-in risk.  Market losses aren’t an accident – they are part of the design.  If markets didn’t go down, you wouldn’t get a reward when they go up.  In investor speak, this is called the “risk premium.”  You get paid a premium for taking on risk.  

I point this out because as we come out of the depths of the valley of the recent stock downturn, it’s important to keep this in mind.  Remember how it felt over this past year to check your balance and have it hurt a little bit.  Remember how it feels now to check and see it recovering.  This is the market cycle.  We say that markets “trend upward” meaning they tend to go up over long periods of time but zoom in on a performance chart and you’ll see that there are many bumps along the way.  You make money in stocks because sometimes they go down.

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