As I’m writing this in October 2022, the S&P 500 — which tracks the top 500 companies in the United States — was at its lowest since March 2020.

Meanwhile, the global inflation rate is at a level we haven’t seen in 40 to 50 years. On top of that, we have a list of other global challenges, ranging from climate issues to war. It’s not looking good.

To people without experience with investing in the stock market, it seems extremely risky to start investing when prices are low.

The assumption is that stocks are down for a reason. On the surface, that seems true. When there’s unrest in the global economy, stocks are generally lower, which is actually a positive thing for long-term investors.

But it’s perceived as bad. They assume that investing is somehow more dangerous when prices are low. But the relationship between risk and reward is not a complicated topic at all.

Put simply: When perceived risk is high, expected returns are high because real risk is likely low. 

Let’s break that down.