Risks and Benefits of the Stock Market

If you were to take a look at the decline in the stock market values during the late 2000s, you might be inclined to avoid investing in the stock market altogether. After all, who wants to lose so much hard earned money in such a short time?

In the history of the United States stock market, there have indeed been many instances of sharp declines within a short period. For example, in 1987, over just a number of weeks, stocks plunged about 36%. Stocks experienced a similar decline between the years 2000 and 2002. Of course, the most devastating crash in American history occurred between 1929 and 1932 and resulted in a total loss of 89% of stock market value.

When you look at these kinds of numbers, it's easy to see why some people are scared of investing in the market and in other ownership investments like real estate properties. How can a person possibly assure himself that these kinds of crashes will not occur for a specific investment?

The truth is that no one can absolutely guarantee any particular investment, so there will always be some risk involved whether you choose to enter the stock market, real estate investing, or the world of small business. However, two key principles can help lessen the risk and perhaps give you a bit of peace of mind when deciding on your investments. These two principles are probably widely known but often forgotten. They are diversification and long-term planning.

Diversification is a simple, but key principle that you probably have heard of many times previously, but you should be careful not to ignore it. Taking a wide variety of stocks can help minimize the damage in case one company's value declines sharply for any reason. However, you should also consider investing in foreign companies because the trends in American stock markets may not have the same effect in foreign stock markets. You can further protect yourself by diversifying your investments and going beyond stocks by entering the world of real estate investment.

Yes, sometimes world markets are affected by global recession, and sometimes both the real estate market and the stock market are declining at the same moment. Nevertheless, this is not always the case, and you have a much better chance of avoiding losses if you spread your investments around.

Experts say that on average one out of three years will be losing years for those investing in stock markets. Of course, the good news is that approximately 2 out of every three years (on average) will be profitable years. What does this imply for the short-term? It means that in any given year, anything can happen to the price of your stocks. If you are patient and invest for the long term, however, you have a much better chance of making a profit.

Ideally, you would hold onto your stock investments for several years, and even more than a decade if possible. Historically, stocks generally give about a 10% annual return, but this requires that you be diversified in a number of different stocks (such as through an index fund) over a good number of years.


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Jacob Lumbroso is a world traveler and an enthusiast for history and foreign cultures. He recommends http://leathersectionalcouch.org/ for anyone looking to buy leather sectional couches.