Today we’re talking all about risk. Now we know that investing in the stock market, historically, has been a good way to build your wealth over time. But, as you’ve probably heard before, there is a cost of admission to play this game. That cost is a risk. Listen very closely: your account value WILL go down sometimes. That’s part of the process, as strange as that may sound. Think about it like this: if your account value never went down, it would be like a savings account at your bank. Are you getting really great long-term returns on your bank account money? Nope! No risk, no reward. So… what are these different types of market risk? Let’s get into I t.
Market risk is the risk of seeing your account value go down, not because of anything specific to one company or sector, or mutual fund, but because the entire stock market goes down in value. Because this risk affects the entire market, it can’t be avoided no matter how diversified your investments may be. Not fun, but part of that price of admission we talked about.
Let’s go through some of the main ones so you can get a feel for what we’re talking about.
Part of the battle is recognizing that risks will always be there and most of it is out of your control. You have to know and understand that there will be tough times when your account value goes down… and sometimes by a lot. But those are not times to panic; instead, those are times to take advantage of the opportunity to buy stuff when it is on sale. Consider putting your strategy down on paper. Jot down a reminder that you know your account value will go down sometimes, but you will not panic and stick to the plan. This will give you an advantage over your peers. You will have a better chance to build wealth compared to those who make the wrong move at the wrong time.
That’s all for now. For more on investing or anything else in your financial life, check our MoneyNav. We hope to see you soon!