Weekend Reading: Looking Up and Down

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading looking up and down stock market Weekend reading looking up and down stock market
Weekend Reading

As an investor, you should be aware of the asymmetric risk-reward characteristics offered by the stock market. Why? They can offer you greater investment peace of mind.


Here are five key implications to consider:

📌 Limited downside: When you own stocks outright, your potential loss is limited to the sum you invested. However, if you engage in short selling, options trading or use margin debt, a bad bet could threaten your entire portfolio. This highlights the importance of diversifying your investments to mitigate the risk of individual stocks becoming worthless.

📌 Unlimited upside: While stocks can potentially lose 100 percent of their value, they can also climb far beyond 100 percent. However, it's important to recognize that eventually, growth will slow down.

📌 Skewness: The stock market's annual gains are often driven by a minority of stocks that achieve substantial growth. These high-performing stocks have a significant impact on market averages, while a majority of stocks may deliver market-lagging results.

📌 Global market recovery: Although individual companies or national markets may lose all value, a globally diversified portfolio of stocks is likely to recover and reach new highs over time.

📌 There’s no ceiling on potential gain: It's important not to underweight stocks, as doing so could mean missing out on significant returns.

You can’t underweight or overweight your allocation to equities, individually or as a percentage of net worth. Finding the right balance for you will be key to your long-term financial success.