Avoid The Market Risks Today

Stock market risk refers to the movement of security prices, which tend to move together in reaction to external events, unrelated to a company’s fundamentals. Market risk is the risk that market pressures will cause an investment to fluctuate in value.

Although you can diversify investment to virtually eliminate business, financial, and operating risk, you cannot do the same with market risk. Diversification does not provide a safety net when an external event causes a landslide in the stock markets. For example, when stock market goes up, most stocks go up in price, including those with less-than-spectacular sales, growth, and earnings. Similarly, it a sell-off occurs in the stock market, stocks with better than average sales, growth, and earnings will be included in the downslide.

External events that move security prices (stocks, bonds, and other assets such as real state) are unpredictable. Such an event could be a terrorist incident or news of a war, death of a prominent leader of a foreign nation, changes in inflation rate, labor strikes, or floods in the Midwest. Investors cannot do much to avoid these volatile short-term fluctuations in stock, bond, and real state prices.

Over long periods of time, however, stock prices tend to appreciate in relation to their intrinsic value. In other words, a stock’s long-term returns are determined by a company’s investment fundamentals. Market risk highlights the dangers for investors who invest short-term money in the stock market. If you need cash when the market has declined, you will need to sell your stocks, which may have produced losses. For stock investments, your should have a long time horizon so that you are not forced to sell in down markets. The same long time horizon applies to investments in real state.