Whenever I told someone (I stopped for the reasons described in the next sentence) that I invest in the stock market, I heard impressed comments and observations that investing in shares is very risky. This is the first thought that people have when it comes to their own money, no one really wants to run the risk of losing what is theirs — but everyone wants to spend money on the latest fashion, right?

The concept of risk in the stock market is something that can be discussed a little longer. The stock market is a very long-term investment, a place where you should only place money that you don't need to use for a long time. The idea of risk is normally pointed to a possible fall or volatility in the price of a share, even if this fall is cyclical or temporary and even if the investor has not sold his or her shares.

The definition of risk for actions is a bit confusing, since we can have a relationship of security and insecurity for the same actions in different or even the same periods. This is more or less the point I want to get to. Investing in stocks has historically been proven to have the highest long-term return (at least in the US), but if volatility in stock prices over this long term can be called risk, then these stocks can be considered both safe and unsafe.

This is a very interesting part that shows these points, taken from the book “The Intelligent Investor” by Benjamin Graham and freely translated by me:

“If a portfolio of shares of qualified companies shows a satisfactory return over the years, the common sense about these shares is that they have proven to be “safe”. During the period the market value of these shares certainly fluctuated, but they were just not sold for a value below the price paid by the investor.”

The book suggests that this confusion can be completely avoided if we apply the concept of risk only when we have a subsequent loss from the sale of these shares, a management problem, a constant decrease in profit, few prospects, growth stagnation, or, even more normal, the problem of paying too high a price in relation to the value of the company.

After a major crisis, like the one in 2008, most investors consider the market to be very risky. But they forget that the fact that prices have fallen so much has made stocks much safer than before. People end up leaving the exchange, when in fact they should be entering. And they end up forgetting that in the long term, the stock market tends to yield more than all other investments.

I hope to continue writing a little more about risk in the next topics and thus increasingly justify my allocation of between 80 to 90% in stocks!

Originally published on 10/06/2010 https://rendapassiva.wordpress.com/2010/10/06/risco-na-bolsa-de%C2%A0valores/ (my old anonymous blog), with some corrections and adaptations.

PS: Nowadays I have 40% of my portfolio in stocks. I can admit that I was much more optimistic about Brazil in the past. Wait for a second part of this article to come, delving a little deeper into risk, return, efficient frontier and specifying where Markowitz was wrong.

Originally published on MEDIUM