by Stacy Francis, CFP®, CDFA
What happened when the Dow took its most recent nosedive? As most of my clients are in it for the long term, my day went on as usual. My friend who is a stockbroker, on the other hand, was slammed with phone calls from nervous investors. With this in mind, I thought I should say something about market risk. How does it affect your investments, and what can you do to minimize your exposure?
Market risk is the possibility that your stocks (or funds) will fall due to overall market weakness. This weakness is commonly brought on by a crumbling economy, raised interest rates, or other types of economical factors. Simply put, market risk is related to the economic climate of a country (or region, or continent, etc) as a whole, rather than a specific company.
Market risk can bring the value of your investment portfolio down – especially in the short term. Looking at it from more of a long-term perspective, on the other hand, economies always follow cyclical patterns of boom-decline-recession-rise-boom. The only thing that varies is the speed with which we move through these cycles. So while in the short term your portfolio may fall off during the phases of decline and recession, if you can wait these out, you can rest assured that sooner or later, the economy (and hence your investments) will come back around.
Apart from not being desperate for cash (or simply impatient), the best way to minimize your market risk exposure is to diversify – to spread your investments across several markets and countries. While the economy is growing increasingly global, different countries are still in different phases of these economical cycles. So if you’re concerned about the US economy, try a fund that focuses on investments in for instance India, or Europe, or Australia.