In today’s global economy, filled with, unrest, uncertainty and volatility, investors who are actively participating in stock market investing face a variety of risks. Although the stock market and risk have always gone hand in hand for as long as the stock market existed, this traditional form of investing has become increasingly risky over the last 5 years, since the massive market crash in 2008.
From my perspective there are four very noteworthy risks, that every investor in the stock market must account for, before making a decision which (in any) stocks to invest in. These are:
- Economic risk refers to whether an economy is performing well or not. A struggling economy puts all stocks at risk, no matter the management team or the brand name strength. Economic risks may not seem too strong at certain times, but during recessions and depressions these become very clear to the investor.
- A lack of diversification can lead to putting “all your eggs in one basket”, which is never good when investing in the stock market because if that stock crashes, you have nothing left to hold you back up. As of late, a popular form of diversifying your portfolio has been through allocating capital to alternative assets, such as gold, oil, precious metals and other non-traditional assets. Diversification won’t allow you to go without risk in the stock market, but it sure can reduce the amount of risk in your portfolio. A highly concentrated portfolio has lost a whole lot of individuals a lot of money over the years.
- Management risk has been a deep concern for all stock market investors due to the high number of management funds “cooking the books”- meaning manipulating stock prices, which happens to be very illegal. In addition, a management fund may simply be falling behind the curve in their industry, leading to a large loss of your capital.
- As inflation rises, the value of the currency falls, meaning the value of the amount of stock you own falls as well. Many experts believe that inflation is a much bigger investment risk that most investors ever recognize.
With the repeated bad performance and the increasing exposure to risk, investors are eager to move away from the stock market and learn about investments in other areas, that are consistently producing profits in an environment with less risk.