Risks of Investing
For experienced investors, some level of risk is expected and even anticipated. Unfortunately, risk can stop beginners from taking advantage of some great investing opportunities. The solution involves diversifying your investments and understanding your risk tolerance so you can make more informed investment decisions. Here are some things to consider.
Market Volatility
The investment market is made up of various investment vehicles. There are markets for bonds, mutual funds, stocks, treasury bills, commercial paper, derivatives, futures, and commodities like gold, silver, copper, coffee, grains, wheat, salt, sugar, rice, etc.
A volatile market means an investment’s value rises and falls unpredictably, with steep declines and sudden, unexpected increases. Some markets and investments are more volatile than others. The bond market is less volatile than the stock market, and the stock market is less volatile than the derivatives market. This is why it’s critical to understand your investments by working with a professional financial adviser.
Economic Downturns
Economic downturns refer to a decrease in a country’s economic activity. A country’s economy is measured by the increase or decrease in its gross domestic product (GDP). The GDP is tracked quarterly. Two consecutive quarters marked by a decline in GDP means a country’s economy is in a recession.
A recession refers to a country’s temporary decline in the number of goods and services produced. As a result, people buy less than they used to. In response, companies will reduce their workforce to save costs and protect their bottom line, forcing those laid off to spend even less than before. A proactive investment plan can protect you during these times.
Inflation
Everywhere you look nowadays, people are concerned about rising inflation and its impact on their cost of living. Inflation is the overall increase in the prices of goods and services people buy and use daily. As inflation increases, your purchasing power of money decreases because your dollar no longer pays for as much as it did before.
This is why commodities like gold are considered inflation-proof and a more stable, long-term investment. Its value is not tied to interest rates like other investments, so it retains its value longer. A professional adviser can take you through the steps of inflation-proofing your investments.
Interest Rate Fluctuations
A simple rule to follow is that stocks will die when interest rates are high, and stocks will grow when interest rates are low. Interest rate fluctuations occur when a country’s central bank increases or decreases the interest rates on the money it lends to banks. Those banks then increase or decrease their interest rates to borrowers.
A higher interest rate means it costs more to borrow money. Rising interest rates can affect the real estate market, as potential buyers may be unwilling to purchase new homes when borrowing costs are high. It also affects companies that may hold off on R&D projects, new hires, or expansion into new markets because of increased borrowing costs.
Working with an Experienced Professional
If all this seems somewhat overwhelming, don’t despair. A financial advisor can help you chart a path through some of this unpredictability. The key is to do your research, understand the investment, and then work with a financial planner to provide a tailor-made investment solution.
