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Risks associated with stock market investing

We can identify two groups of risks associated with stock market investing. The first group are the minor risks, that have to do more with you and your decisions, and the second group are the major risks, which affect everyone on the market, and those have to do with the state of the economy; so, if you have some control over the first group of risks, you certainly don’t have any control over the second group of risks.

Minor, personal risks

• Bad judgment – you simply misread what’s happening on the market and you take the wrong decision, which will cost you some money. The right way to avoid that is by listening to your broker.
• Panic – that’s you biggest personal enemy on the stock market. A lot of beginner traders do panic when they see their shares doing down, so they sell in the worst possible moment. To avoid doing that mistake, you need to understand that stock market investing works better if you think about it as a medium and long term investing. So, there is no need to panic if, at a certain point, some shares from your portfolio are going down.
• You are too conservative – taking a lot of time to analyze tour moves is generally a very good thing, but on the stock market it might cost you some money. You need to be capable to make quick decisions.

Beside those manageable, there is the other category, the major risks, which will affect you, the other investors, the entire stock market, US economy, world economy – well, you got the point; there is no escape from this type of risks. You can, however, minimize your losses, even on a bad market. So, what are the major risks related to stock market investing?

• The economy starts going bad. In the last decade, we saw that a lot: in 2008- 2009 the market reached historical bottoms and a lot of people lost their money. During economic crisis, investing overseas is not a solution. Thanks to the globalization, if the economy is bad in the US it’s probably the same in the rest of the world – or, if it’s not yet, it will be soon.
• Inflation is the consequence of a bad economic period – not only stock market investing is affected by the inflation, but also all forms of investments. Actually, other investments, like real estate or gold, are affected by inflation more than stocks. So, although you can’t really avoid the prejudices caused by inflation, keeping a part of your savings in stocks it might be a good idea. The safest strategy, during such periods, is to invest in big, reliable, well-known companies.
• You can get caught in the bad context: you have a good, solid portfolio, but the market starts acting crazy for a while, chasing some new companies or industries, and leaving others in disgrace. In times like that, you don’t have any reasons to start selling – if you have shares to good, strong companies, you just wait for the wave to pass and maybe you even take the chance and buy some new shares at very good prices. An important thing you need to keep in mind is not to limit yourself to a single industry/economy sector, because this mechanism, if it becomes active, will affect you even more.