I got this from a friend via email.Â Â Not sure whoÂ the author is, butÂ they are good points to note while learning to invest.Â
There are four major risks that investors face when investing in stocks.
Risk #1: The economy
The most pressing risk of investing in the stock market is that the economy can always take a downturn. A combination of factors can cause the market indexes to lose significant percentages. In fact, we are just now returning to the levels of the pre-September 11 market.
In general, the economy is just going to happen. There is nothing you can do to control it. Most young investors are best off if they just ride out the downturns. Investing for the long run really helps. In fact, many investors use the downturns to pick up stocks that are good solid companies at a slightly lower price.
If you are an older investor, a major downturn of stocks can be devastating if you haven’t moved the significant portion of your portfolio from the stock market and into bonds or fixed-income securities. This is where management and risk tolerance really comes into play. Don’t put things off. You never know about the economy.
Risk #2: Inflation
Inflation will always be a risk to investors. It hits everyone, no matter their savings or portfolio size. It will destroy the value of your dollar. It is the cause of recessions. We like to believe that we can control inflation, but sometimes the cure is just as bad as the problem. Higher interest rates can help to mitigate inflation, but they can also hit the market in a negative way.
Investors usually retreat to hard assets, such as real estate, when inflation gets high. But in most cases, stocks are usually a pretty fair protection against inflation. the idea is that companies have the ability to adjust prices to the rate of inflation. There are some industries and sectors that adjust more than others, so you should diversify your investments. Investors are hurt by inflation by the erosion of the value of the dollar. Those on a fixed income will suffer the most. That is why it is a good idea to keep a portion of your assets in stocks, even when retired.
Risk #3: Market Value
Market value risk occurs when the market turns against your investment, or even ignores your investment. For example, the market often chases the next hot stock, leaving many good companies behind. Some investors will use this to their advantage — buying stocks before the market realizes their potential.
However, it can also cause your investment to flat-line while other stocks rise.
Diversification between different sectors of the economy is key. When you spread out your investments, you have a better chance in participating in growth.
Risk #4: Becoming too conservative
There is nothing wrong with being careful. However, you can go too far in how conservative you are. If you never take any risks, it is probably that you will not reach your investment goals. You know that investing in a savings account for the next 20 years isn’t going to give you enough of a return to retire. You have to be willing to accept some risk. Just keep it under a close eye.
When you know the risks of investing and research your stock potentials, you make decisions that help you not only mitigate risk, but eliminate a large portion of stress as well.