Not all risk is good in the stock market.

Not all risk is good in the stock market.
The more risk you have, the more return you should get to compensate you for that risk.
In investing, we use standard deviation to measure risk. It is a measure how much a stock price swings high and low compared to the average price. A low risk stock is more predictable and has less swings. Examples of low risk companies would include utility companies or consumer staples. A high risk stock is less predictable and be more volatile. Technology companies are higher risk stocks because future revenue is not as predictable given innovation and changing technology.
Time horizon is the length of time you can part with your money before you need it again. The longer your time horizon, the longer you can stay invested. With a long time horizon, you can potentially wait out a dip in the stock market or an individual stock’s price. The shorter your time horizon, the less risk you can take.
I recently did a video about young people putting a substantial amount of their portfolio into riskless or near riskless investments like treasury bills, high yield savings accounts, and CDs. The issue with this choice is that these people have long time horizons, and therefore they should be in more risky investments that offer more return.
A risk premium is the return in excess of the risk free rate of return. At this point in time, the risk free rate of return is relatively high compared to the past decade when there was cheap money and low interest rates. There have been a number of article describing the stock market as unattractive given its returns versus the returns of risk free investments. Despite this, I believe young people still need exposure to the stock market. While inflation appears to be cooling off, it is still high and to have money in risk-free investments yielding 4% or 5% is just not going to cut it.
When it comes to investing, Nobel price laureate Harry Markowitz said that diversification is the only free lunch in investing. Therefore, make sure you are being compensated for risks that you are taking in your investments. Diversification is an easy win to reduce risk. Not all risks proportionally compensate you. Just because you invest in risky investments does not mean you have the opportunity to earn a correspondingly high return to compensate you for taking on that risk. So make sure you are being smart with your investments and considering the risks you are taking, and that you are being appropriately compensated for those risks.
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