Risks of the Stock Market
Investing in the stock market comes with inescapable risks. On any given trading day, the potential for investment losses exists courtesy of domestic and international conditions and occurrences. Based on both founded and unfounded enthusiasm and fears, there's an irrational human element at play, which frequently guides stock market direction. These risk factors, which impact the stock market at large, are called systematic risks. In addition, unsystematic risks germane to individual stocks in your portfolio come with the investing territory, too. While systematic and unsystematic stock market investment risks can never be altogether eliminated, there is nonetheless an investor consensus as to how best to manage them.
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Long-Term Investing
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Investment risks are sometimes classified into two categories: alpha risk and beta risk. Beta risk encompasses general market behavior, while alpha risk specifically addresses the risk inherent in holding shares in unique companies.
When one surveys the stock market's performance over time---through both bull and bear markets---the efficacy of a long-term investment strategy becomes clear. According to S&P 500 index figures since 1973, stocks have scored annual gains 75 percent of the time. On average, negative returns occurred in just one of every four years.
By investing in the stock market with the future in mind, and not fixating on daily price fluctuations---or even overall market downturns---the prospect of realizing gains is more likely than not. Simply understood, a long-term investment strategy is more likely to replicate the stock market's historical advances over wide expanses of time.
Risk Management
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While a long-term investment strategy is considered the safest stock market play, it nonetheless is grounded in several factors. For starters, a sound, long-term investment stance does not entail holding onto, in perpetuity, under-performing stocks. You cannot permit deadbeat stocks to drag down your entire portfolio. If a particular stock is performing well below its industry competitors for two to three years consecutively, it's ordinarily a prudent idea to cut it loose. Ideally, you want your long-term investments to supply you with more good years than bad years. By scrupulously reviewing the performance of the specific stocks in your portfolio---and weeding out the poor performers---you improve your odds and reduce risk. This carefully calibrated approach to investing is called risk management.
Before buying stocks, research the companies of interest to you. Apply this same conscientious approach before selling shares of stocks, too. Multiple stock research venues can be explored to aid and abet your decision-making, including Motley Fool CAPS at caps.fool.com and PowerRatings at powerratings.net.
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Diversification
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Maintaining a diverse portfolio---a mixture of stocks and bonds---minimizes unsystematic risk. By simultaneously investing in different types of securities in assorted sectors of the economy, you protect yourself against industry-specific downturns wreaking havoc on your collective investment portfolio. For example, an investment strategy that relied too heavily---or worse, exclusively---on the dot-com companies of the late 1990s proved disastrous. The rapid, industry-wide collapse of many high-tech firms ravaged countless investors' portfolios. Because their descents are often fast and furious, solely investing in "hot stocks" in "hot industries" multiplies the risk factor in which you have jurisdiction.
Cost Averaging
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The concept of cost averaging encourages you, the investor, to buy securities when the market is at low ebbs. By purchasing undervalued stocks when prices are depressed, you buttress your long-term portfolio performance because the average cost per share in your aggregate investment decreases, which is---optimally---what you want.
Less Risky Stocks
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Certain securities are deemed safer investments--that is, reputable companies with track records of both stable earnings and minimal liabilities. They have long been referred to as blue-chip stocks.
And while some former blue-chip stocks, including GM and Citibank, proved unworthy of the designation, it's still a savvy investment strategy to maintain a sampling of the best-capitalized companies' stocks in your portfolio. For information on these companies, peruse the Financial Times Global 500 via ft.com. Most of these corporations pay regular dividends to their stockholders. And while they are unlikely to surprise you with colossal share price gains in any given year, abrupt declines in value are equally improbable. Over the long term, including steady---but reasonably certain---gainers in your investment portfolio enhances your prospects of profiting in the end. Companies repeatedly on the Financial Times Global 500 listing include IBM, Walmart. Coca-Cola and Exxon-Mobil.
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