Candlestick Trading Blog

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Playing It Safe Is Risky Business
There is a great deal of hazard to investing in the stock market; some of the investment risk is within your control, some of it is not. While you can’t eliminate your investment risk, you can develop a stock trading plan that defines your desired goals. This will help you to keep your investment risk at a level you can accept.

There is investment risk for which there is no control. It is possible that the investor can foresee it and will be forced to either adjust the stock portfolio or wait out the problem at hand. Below are four main types of investment risk and where possible, strategies to cope with these events.

Economic Events
The watermark for the effect of economic events is the post 9/11 economy. The stock market had just taken a significant hit and after the terrorist attacks, the US economy plummeted. This dive took most of five years to turn around. For many investors, doing nothing in times like these is the best thing to do. For others, looking at conservative companies or overseas investments can be another alternative.

Inflation
Inflation creates an investment risk for everyone. It is like an insect that eats away at a fruit crop, eating away profits as it goes. The problem is that sometimes the poisons used to eliminate the bugs are worse than the pests themselves. Inflation causes investors to look for investment options with less investment risk, such as gold and real estate. It is also good to maintain some assets in stocks as well since companies do have the ability to adjust prices to the rate of inflation.

Changes in Market Value
This includes the entire concept of undervalued stocks. With all of the media focus on the stock market, there are too many times that investors will drop a company to chase other hot stocks. This phenomenon will drive down the value of a perfectly good stock for no apparent reason. The key here is to avoid investment risk with portfolio diversification. Avoid having all of your stock in one stock sector to eliminate this danger.

Over-Conservative Approach
Of itself, being conservative isn’t an investment risk; being conservative is actually the best approach for long term investing. The investment risk in a conservative approach is when you are so conservative that you can’t meet your financial goals. Let’s face it, if you put your money in the bank, it’s very safe. The question is, can you accumulate enough with that 2% interest to have the type of life you want when you retire? In a case like that, the investment risk isn’t losing your money; it is not having made enough to subsidize your future.

There are many investment risks in the stock market; some of these can be foreseen and others can’t. It is important to identify your goals, be diligent with fundamental analysis and react appropriately to changes in the stock market.