Managing Stock Market Risks
Factors affecting the whole market might include economic growth, recessions, inflation, interest rates, currency fluctuations, etc. These factors are unpredictable yet create volatility and risk in the stock market.
Systematic risk is the risk related to the stock market as a whole. Factors affecting the whole market might include economic growth, recessions, inflation, interest rates, currency fluctuations, etc. These factors are unpredictable yet create volatility and risk in the stock market.
Volatility doesn’t seem to bother most investors during bull markets. This is one reason investors are “lulled” into taking additional risk as markets rise. Most investors don’t realize that portfolio volatility by itself will reduce returns. In addition, as more and more people “follow the crowd” they let their emotions cause them to buy more when prices are high and sell after prices have fallen.
None of us knows what factors will cause the stock market to go up or down. That is why the stock market is risky. Since we can’t control stock market risk, we have to implement risk management solutions that put the odds of investment gains heavily in our favor.
Market timing is especially easy to do with mutual funds. Resist the temptation. Participation in the best up months is far more important than avoiding the worst down months, and the really dramatic upward surges in stocks are unpredictable, of short duration, and few and far between. Market timers risk being in cash when the bull stampedes. Missing out can make a big difference in your long-run returns.
Being disciplined and using cost averaging!
Investing monthly in a specific stock is a great way to build wealth and cope with market ups and downs. Your fixed investments buy more shares when prices are down and fewer at higher levels.
Cost averaging can help people become more disciplined because it encourages investing during market nadirs when individuals otherwise might be too fearful. A particularly good strategy is to double up on your investments when prices are depressed, if you’re able to. This will help enhance your long-term performance, by further reducing your average cost per share.