In: Categories » Legal and finance » Stocks and mutual funds » You could lose a substantial part of your investment
The big and overriding risk in investing is loss of some or in extreme cases all the money you’ve invested. In the worse case scenario, you can lose everything you invest and incur additional losses in the process! If the thought of losing any of your money at all is more than you can bear, please do not consider investing in the stock market. If you’re inclined to worry a lot about your money and its safety, invest only in financial instruments of minimal or no risk, such as insured CDs.
You can’t see into the future
What makes stock investing both maddening and fascinating is that in the long run, with patience and discipline, you can make some real money, perhaps as much as a consistent 10 to 12% return on your investments. But what nobody knows is when the inevitable downturns will come and how long they will last. Most of the 1990s has been very profitable for investors. Along the way some stocks have had explosive gains, especially high-tech stocks. Other solid, well-managed, and profitable corporations have shown relatively little gain. Some have even lost ground. Some losses are short-lived and are quickly recouped, but other sharp drops in the overall stock market can last for years. The most famous was the market crash in October 1929. The market took more than three years to recover losses from that crash.
There is no money-back guarantee
Risk is inherent in stock investing. No federal agency or wealthy corporation insures the money you invest in stocks. You make your choices, and you live with the outcomes.
You don’t have total control
Today’s economy is a global economy. Events happening on the other side of the planet events that are totally beyond your control can influence the stock market. For example, the Gulf War in 1992 led to fears about crude oil supplies, and the stock markets reflected those anxieties.
If the Federal Reserve Board or its Chairman decides that inflation is beginning to rise and that the economy is overheating, investors begin to worry about rising interest rates. Sometimes, these concerns cause a decline in stock values. Information moves quickly these days because of the remarkable advances in communications technology. Even hints that a company’s profits may not be up to Wall Street’s expectations can lead to sharp losses in the value of individual stocks. Even the biggest brokerage firms on Wall Street and the large mutual funds managers with all their research and analytic capabilities cannot successfully anticipate every large movement in the market as a whole, and much less, the swings in value of individual stocks. The first and last rule for the new investor: Learn how to live with the risks of investing. If you want bigger gains, you must accept more risk. The good news is that there are ways to control and manage your risk.
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