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We have covered 4 major types of financial risks associated with equities that investors face while dealing with equity markets.

Stock market investment is a risky business.  Any kind of investment decision should be made with proper analysis and selection. It should be taken while taking into consideration your goals and risk profiles. However, other risks are inherent to investing you have no control over. Some risks are in your control whereas a few risks aren’t.  Most of these risks affect the market or the economy and require investors to adjust portfolios or ride out the storm.

Risk reward chart

 

 

Economic Risks

The most important of all the risks of investing is the fact that the economy can move in either direction. During a downturn, the best strategy is often just to hunker down and ride out these downturns. These troughs are often the best time to buy value stocks.

Thanks to globalization, some U.S. companies earn a majority of their profits overseas. However, it collapses like the 2008-09 disaster, there may be no truly safe places to turn.

Inflation

Inflation taxing on everyone. It destroys value and creates recessions. Although we believe inflation is under our control, the cure of higher interest rates may at some point be as bad as the problem. Government borrowing is used to fund stimulus packages. It is only a matter of time before inflation returns.

Risk and Return

Investors historically have retreated to “hard assets” such as real estate and precious metals, especially gold, in times of inflation. Inflation hurts investors on fixed incomes the most since it erodes the value of their income stream. Stocks are the best protection against inflation since companies can adjust prices to the rate of inflation.

A global recession may mean stocks will struggle for a protracted amount of time before the economy is strong enough to bear higher prices.

It is not a perfect solution, but that is why even retired investors should maintain some of their assets in stocks.

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Market Value Risk

Market value risk refers to what happens when the market turns against your investment. It happens when the market goes off chasing the “next hot thing” and leaves many good, but unexciting companies behind. It also happens when the market collapses – good stocks, as well as bad stocks, suffer as investors stampede out of the market. Thus, it advisable to not time the market. Pick good companies based on their intrinsic value and sit on the stocks until they reach their potential.

The above stampede is sometimes the best thing to happen. It can act as an opportunity to load value stocks at a time when the market isn’t bidding down the price.

The lesson is: Diversify.  By spreading your investments across several sectors, you have a better chance of participating in the growth of some of your stocks at any one time.

Extreme Conservative attitude

It is always good to be a careful investor.  It does not mean you never take any risk! This shall never let you attain your financial goals.

You may have to finance 15 to 20 years of retirement with your nest egg. Keeping it all in savings instruments may not get the job done.

Conclusion

Learning about the financial risks of investing and doing your homework on time can help you make decisions that will let you meet your financial goals.

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