Thrills of a Financial Roller Coaster - Risks and Returns in the Stock Market

By Kevin Liu

THE BEGINNING

As a kid in middle school, I had no idea how the financial world worked. To me, the words “finance” and “Wall Street” really just meant $money$ and a whole lot of numbers. I watched my mom invest in the stock market with quite some success, and finally one day, as an extremely naive and fearless little kid, I decided that I wanted to try my hand in the market. “I’m pretty good at math and I love dealing with money. This can’t be that hard,” or so I had thought…

Little did I know, that would be the moment that propagated me deep into the realm of finance, and since then, finance has been a huge part of my everyday life.

KEY LESSONS

During the first 3-4 years of my stock market experiences, I mostly played around with simulations. Unexpectedly, I lost money time and time again, forcing me to restart the simulations countless times. However, throughout that whole process, I gradually started to learn. I will highlight a few of the lessons that I’ve learned:

  1. Financial markets are far more complex than most people can imagine.

  2. In order to make money in the long run, you have to do your research.

  3. It’s not called “playing” in the stock market. It’s called INVESTING.

  4. The Golden Rule: you won’t always make money.

At first, the Golden Rule might seem a little odd. If you are making an investment, and you’re doing extensive research, shouldn’t you also be reaping the gains all the time? Unfortunately, regardless of how much research you do or how careful you are, there will always be things that you can’t foresee happening. Especially if you invest in the short-term, random occurrences can happen at any moment, and you have to make sure you are fully conscious and prepared for these unexpected tragedies. All in all, in life, there is risk to everything we do, whether it’s driving a car or even just saving money in a bank, but taking risks is also the only way to gain anything. Nothing in life comes without a price, and risk is the price you have to pay when investing in stocks. Thus, people must find the perfect balance between how comfortable they are with risking a part of their savings with the amount of risk that they take.

MY EXPERIENCE

In my own experience, I have found that the majority of my portfolio is filled with stocks with relatively high security. Or in other words, I have a fairly good amount of confidence that the company will not drop significantly in the foreseeable future. But, I also leave a portion of my savings to invest in more volatile stocks so that I can learn more about smaller companies, as well as hope to earn a little more than I would from investing in a blue chip company. I have found this method to be quite effective, and it has really allowed me to achieve most of the financial goals that I have set over time.

Of course, even with a few years of trading under my belt, I still don’t and probably never will fully understand the financial market. There is a lot for me to learn, and that’s really all I wish to do: just learn as much as I can from any available resources. Though there is significant risk involved, I still find the prospect of finance very interesting. Every single day, something different and exciting happens in the finance world, and it really tests your nerves sometimes since you’re constantly dealing with real money. But I believe that as long as risk is managed properly, the end return will be worth it :)