Managing Risk In The Stock Market

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It's common for investors to feel anxious about investing in the stock market, especially when market events can occur that cause share values to drop. There's no guarantee that your investment won't be affected when stock prices go up and down. Yet, research suggests that “keeping calm and carrying on” in the face of falling share prices may be beneficial to your portfolio since history has shown the drop is likely to be temporary. Stock prices can rise and fall from day to day, even minute to minute. Remember that if you choose to sell your shares during a market panic for less than the purchase price you may experience a loss on your investment.

Investing for the Long Term

In the past, the stock market has realized more gains in value than experiencing losses. However, past performance does not guarantee future results. This is the underlying “buy-and-hold” strategy of stock market investing. If you choose to sell when prices are low, you not only lose the value of your initial investment, but you also may miss out on any subsequent gains in value when the stock market recovers. For this reason, your investment portfolio may increase in value the longer you own it.

For example, fluctuations of 20% or more in share prices may occur, with daily performances rising 53% of the time, but can also fall 30% or more. Although that doesn't seem like much of a difference, the fluctuation in share prices is enough to produce solid returns over time for investors.

From 1990 to Today, The Historical Average Stock Market Return Is 10%

The S&P 500 index comprises about 500 of America's largest publicly traded companies and is considered the benchmark measurement for annual returns.

The graph shows the current value of the S&P 500, as well as its year-to-date, five-year and 10-year returns. Between 1990 and today, there have been positive stock market performance years and down years. Over the illustrated S&P 500 30-year period, the stock market fluctuations have averaged a positive return for investors. Remember that the stock market's long-term average is before inflation is factored in; investors lose the purchasing power of 2%-3% per year, on average, due to inflation.

“If you have more trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.” — John Bogle, founder, The Vanguard Group.

Addressing Risk in Your Investment Portfolio

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 lower-risk securities typically produce lower overall returns. However, lower-risk investments are not void of risk either. Remember that putting all of your eggs into one basket isn't the best option to avoid risk.

Work With a Financial Professional

A financial advisor will explore investment opportunities across a variety of risk levels, and include stocks, bonds, short-term securities and alternative investments—if appropriate, to create a mix of investments specific to your situation. This mix of asset classes helps reduce portfolio risk so that when one investment drops in value, the others may continue to gain value. Diversifying the types of investments, addressing different types of risk in your portfolio and including a wide range of financial products can lessen the likelihood of losses over time.

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Financial advisors with BECU Investment Services are here to help. Our team gets to know you and understand your goals so they can implement a financial and investment strategy that's best for you. Get started by scheduling a complimentary consultation or call 206-439-5720.