Managing Risk In the Stock Market

Managing Risk In The Stock Market

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When your shares drop in value, sometimes the best reaction is no action at all.

It's common to feel anxious about investing in the stock market. There's no guarantee on your investment and stock prices go up and down frequently. Yet research suggests it's best to "keep calm and carry on" in the face of falling share prices. Because even if the value of your investments drop, history has shown the dip is likely to be temporary. But selling your shares in a panic for less than what you paid for them guarantees you'll take a loss on your investment.

Investing For The Long-Term

"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks" - John Bogle, founder of investment management firm The Vanguard Group1

It's very common for stock prices to rise and fall wildly from day to day, even minute to minute. Fluctuations of 10%2 or more for share prices should be expected. On a day-to-day basis, the market rises 53% of the time and falls 47%.3 That doesn't seem like much of a difference, but it's enough to produce solid returns for investors. When calculated on a 12-month basis, the market rises 73% of the time.3 Over a 10-year period, it goes up 93% of the time.3

In other words, in the past the market has gained in value more often than it loses. Past performance does not guarantee future results. This is the principle underlying "buy-and-hold" strategy for stock investing. If you sell when prices are low, you not only lose the value of your initial investment, but you also miss out on any subsequent gains in value when the market recovers. This is why you are more likely to see your investments increase in value the longer you own.

Value Of A Single Dollar Invested In 1926

Raymond James published an 85-year history of the securities markets to study the hypothetical growth of a $1 investment between 1926 and 2010. A single US dollar ($1) invested in 1926 has been calculated to hold an estimated value in 2010 of $16,055 for small-cap stocks, $2,982 in large-cap stocks, $93 for government bonds and only $21 for treasury bills (T-Bills).4

Managing Risk in the Stock Market

Manage Your Risk By Diversifying Investments

It may be tempting to avoid financial loss by staying away from higher-risk investments altogether. Yet investing only in lower-risk securities severely limits your potential investment income, since these typically produce lower overall returns.

An appropriate way to potentially retain value when stock prices fall is to avoid putting all of your eggs into one basket. Explore investment opportunities across a variety of risk levels, including stocks, bonds and short-term securities. The end result should be a mix of investments, known as a portfolio, where if one investment drops in value, the others may potentially still be gaining. Diversifying the range of financial products you invest in makes your portfolio less dependent on the value of any single investment.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

*McQueeny, Ryan. "Three Quotes for Investing During Uncertain Times." 9 August, 2017. NASDAQ. 
**Lim, Paul J. "Why the Stock Market Is Crashing Now, and What You Should Do About It." 5 February, 2018. Time.
***FutureAdvisor, "Long-Term vs. Short-Term Investing."
****Ross, Sean. "Proof That Buy-and-Hold Investing Works." Investopedi

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