Read? Don't Be a Yield Pig
Who is the Yield Pig? Someone who is chasing for higher yield without seriously considering the risk of capital loss in risk/reward analysis.
Risk, Inflation, and Time Horizon
So what is the risk in stock investing? Capital loss?
So is capital loss the real risk in stock investing? Yes or no. It is actually very much depending on your investing time horizon.
If you are a very short-term investor who will need money next year to fund big ticket expenses. Your risk is capital loss as the stock market may force you into realizing your losses by liquidating your losing positions to raise money to fund your expenses.
But, if you are a long-term investor with 20-year time horizon holding a portfolio of solid blue chips, what is this current paper losses means to you?
Nothing!
Probably, this paper losses may cause you some emotional stress and heartache. That is all! You are not going to jump out of the window. Right?
Risk to a short-term investor and long-term investor is totally different. As a short-term investor, your risk is capital loss so you may like to re-read that article on "Don't be a Yield Pig!" and fully understand it.
But, if you are a very long-term investor, your risk is actually inflation and yield on your portfolio. If you can't grow your portfolio faster enough to over ride the year-on-year inflationary effect. You may be a dead pig at the end of your 20-year time horizon. So don't be afraid to be a Yield Pig if you are a long-term investor.
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