Unless you’ve been living under a rock since New Year’s Day, you should be well aware of the
tumultuous events that have been taking place around the world – the disaster in Japan and the
uproar in the Middle East and North Africa are just a few global measures that are causing
economic changes around the globe. We’ve seen gas prices soar and a rise in food and beverage
commodities, but the place in which these changes are especially apparent is the stock market.
Inflation has caused investors to shift their assets and determine which of the world’s financial
markets are being hit the hardest with higher interest rates and a rise in inflation. If you have any
game pieces playing in the stock market you’ll surely want to know which markets are being
affected by the ever-changing economic fundamentals. Let’s discuss the possible risks that your
portfolio faces, and aim to strengthen any weak spots.First off, let’s discuss the risks you must
consider – inflation and interest rates. These are two of the biggest factors to put into perspective
when considering stock market choices. Currently, higher energy and commodity costs are
sticking it to both consumers and producers. However, the big question that investors need to
mull over is how much of these high prices are due to speculation. Instead of looking at
speculations in the stock market, it’s crucial to consider supply and demand realties, and how
they will subsequently affect inflation, and in turn interest rates. Possible solutions to market
volatility and the risk of rising inflation and interest rates starts with broadly and efficiently
diversifying your portfolio. Here are some suggestions of market choices to invest in during this
time: U.S. and international stocks, commodities, inflation-protected bonds, real-estate
investment trusts and cash, all of which have the ability to withstand inflationary bouts.
Next, let’s discuss the risks you must anticipate – war, disasters, political and economical
upheaval and social unrest. While the stock market is extraordinarily resilient, and has been
fighting against all the shocks in 2011 so far with great momentum, it’s hard to say whether it
will continue to stand firm against the current troubles in the Middle East and Japan that are
disrupting the technology, automobile, and oil industry. Possible suggestions for anticipating
these risks include adding gold and other precious metals to your portfolio, as well as
implementing hedge-fund-like long-short strategies, which attempt to generate stock-market
returns, but with lower risk. Essentially, you bet that some investments will rise while others
will fall.
Of course, we must discuss the risks that never go away – markets and companies. Yes, market
risk is inescapable, but don’t view your portfolio like betting at a horse race – because the
favored winner may inevitably lose horribly. The key to market strategy is diversification and
implementing a safety margin. Keep these three risks that all investors should understand in
mind: valuation risk – overpaying for an asset, fundamental risk – buying something that turns out
to be flawed, and financing risk – using leverage. Other suggestions include avoiding
concentration in similar stocks and mutual funds, as well as never overlapping markets or
sectors.
Finally, a risk you must fear is that of playing it too safe. It’s a difficult balance to find – risk it
all and you could end up with too many losses, risk too little and you could be in danger of not
having enough money in later years, and of missing major market advances. Any suggestions
for not playing it safe simply revolve around going around your judgments and taking small risks
that yield small returns. Hopefully then you’ll start to feel more confident in your investing
strategy. Unless you can predict the future, it’s crucial to embark on a strategy that will preserve
capital in a period of heightened volatility. Simple steps like assessing risk, identifying
opportunities and looking past the present and into the future can shed light on how to handle the
markets twists and turns. And even though the future of the stock market can never be certain, at
least you can equip your portfolio with a nice safety net.