09. Market risk

What is Market risk?

The risk that during the normal lurches upward and slides downward that markets experience, you’ll have to sell some investments when the markets are down.

How this risk plays out in the real world

Jun 08, 2017: Stock market’s recent moves aren’t setting up like the 1987 crash
Oct 16, 2016: Stock Markets Trade In Line With Oil Volatility
Oct 23, 2014: T. Rowe Price CEO: There’s no ‘single factor’ causing market volatility
May 07 2014: Wall Street freaks out about small caps flirting with correction territory
Mar 07, 2014: Five Years Into Bull Market Bears Still Waiting For The Drop That Hasn’t Come

Connection to other risks

This risk relates to Economic risk in that it’s often difficult to tell one from the other. When markets fall, it may initially be difficult to tell if the drop is temporary or caused by a significant problem with the economy that investors are only beginning to recognize.

How investors can manage Market risk

  1. Keep an emergency fund of cash around representing three to six months’ of living expenses. This way, you’ll never be forced to sell your investments during a temporary market dip just because you need cash quickly.
  2. Set limits with your broker on how little you are willing to sell your various stocks for. If they fall down to these price levels, they’ll automatically be sold.

A final word

When a few down days turns into down weeks, you may be shaken you out of your belief in the corporation you invested in. The drop may have little to do with the corporation. It may be that after a significant run-up, markets are taking a breather and pulling back. Or, it could be a series of unsettling headlines that have investors questioning the wisdom of being invested. Unless something has changed with the corporation you selected, you would be best served to stick with the investment.

2017-09-08T01:42:20+00:00