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Material Risk In Equity Investing

Risk in short term say upto a year of investment horizon – losing a large part of your capital

Risk in medium term, say investment horizon of 5 years: not matching up to fixed rate return (don’t forget to adjust for taxes) you would have realized had you invested in such instruments (say bank deposits) instead of equities.

Risk in long term, say a decade or more: Here’s where things get complicated. I can think of single most important risk to long term equity investing - the geography you are investing in doesn’t see decent economic growth on per capita basis or in worst case - becomes a failed state. Equity markets mostly follow economic growth in the long term and they may not deliver in such situations.

The first two “risks” are difficult to predict but easy to manage. The last one, which in my opinion is the “real risk” in equity investing may actually be easy to predict as there will be good many warning signs before such situation manifests. However, management of such a situation may be difficult if not impossible!!!  

Don’t forget- when I say equity investing, I am only considering indexing only!!!

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