How To Manage Market Risk & Avoid Losing Money In The Next Stock Market Crash
You’ve probably heard of the phrase “market risk”. So at some point, you may have also asked yourself some of these following questions…
What is market risk?
Are there any ways to avoid market risk?
How risky is the stock market?
Can I lose all of my money in the stock market?
When will the next stock market crash happen, that may affect the entire market?
If you would like to learn the answers to those questions, continue to read on, as we’ll discuss all of these and more in greater detail…
By the way, if you’re also looking to increase your retirement income WITHOUT risking your nest egg to stock market losses... then be sure to watch our free video here.
What is market risk?
Market risk, put simply, is the risk that you could lose money from the investments that you’ve made in the stock market. If the stock market goes down, then the money that you’ve invested could also decrease.
There’s a period of time, from 2000 to 2010, that is referred to as the “Lost Decade”. Over those ten years, the S&P 500 Index lost around 24%. (From 2000 to 2003, it lost 49%, and from 2007 to 2009, it lost a further 57%.) So, if you had your money invested in that index over those 10 years, you would have lost around one quarter of your savings. And, you would have also missed out on 10 years of growth potential. This huge loss still occurred even though the stock market actually went up in 6 out of those 10 years, showing the importance of managing market risk!
Did you know… from 2000 to 2019, the true annual rate of return for the S&P 500 Index was only 2.96% per year!
Are there any ways to avoid market risk?
Once you understand what market risk is, the very next question is usually about how to avoid it! There are ways that you can avoid market risk and still grow your assets. You can actually accumulate as much wealth as you want, with no market risk at all. However, you do have to be careful that you don’t go “too safe” with your investments. Otherwise, you’ll then have to consider some of the other big risks that we’ve talked about in our recent article, where we discussed the top 10 retirement planning risks and how to avoid them.
So, you need to have financial products that can offer both protection from market losses, and also a good rate of return on your money. The options that might work best for you will depend on your own personal situation, but risk management is a necessary part of any plan.
Did you know… many financial advisors don’t have access to the specific products mentioned above, so make sure that you do speak with a financial professional who specializes in this area, while also managing overall investment risk.
How risky is the stock market? Can I lose all of my money?
There are no guarantees when investing in the stock market, so you indeed could potentially lose all of your money. There are people who have actually lost every penny that they’ve invested in the financial markets! It can be very volatile, and it’s impossible to continuously predict when it will go up or go down, so it’s very risky to have all of your money in the market.
The “power of loss” is something that you should definitely be aware of when it comes to market risks. Math works in mysterious ways, and I’ll show you a simplified example here… Let's say that you have $100,000 invested in the market. The market goes down 50% in year one, then it goes back up 50% in year two. How much money do you now have left? Maybe it’s still at $100,000, because it went down 50% and then back up 50%? That answer seems to make sense, but it’s unfortunately not correct. Let's quickly do the math together…
If you have $100,000 and you lose 50%, you’ll then have $50,000 left at the end of year 1. If your investments then go back up 50% in year two, you’ll end up with $75,000. That’s because a 50% increase on your new balance of $50,000, is only $25,000! You would actually need to earn 100% in year two, if you wanted to make up for the 50% loss in year 1. Only if your $50,000 increased by 100%, would you be back to your original $100,000.
It’s hard to predict with certainty what will happen in any market, so the best thing that you can do is to reduce and eliminate as many market risks as possible before they become a problem! For example, interest rates can go up or down, so interest rate risk is one thing to keep in mind. There are ways to avoid portfolio risk altogether though, and ensure that you have a guaranteed fixed income in retirement. While putting a plan in place and measuring market risk, you can look to diversify your asset classes. But if you do truly want a safe retirement plan, then be careful not to replace one risk with another. There are all sorts of risks… some that you can control, and some that you can’t (i.e. exchange rate risk / currency risk - think foreign exchange futures, commodity risk, systematic risk, etc.).
Did you know… Warren Buffet is known by many as being one of the most successful investors in the world. A famous saying of his is; “The first rule of investing is to never lose money. The second rule is to never forget rule number one”.
So, when will the next stock market crash happen?
Many people search for information and expert advice regarding this question. However, the true answer is actually very simple… nobody knows for sure when it will happen! Experts often can predict things incorrectly. They’ll be quick to remind you of the times when they were occasionally right, but they won't remind you of all the times that they were wrong. The only guarantee with the stock market is that it will rise, and it will fall.
Don’t forget: If you want to learn more about the top 10 retirement risks and how to plan against them, then watch our free video here.
I hope this article was able to help you understand market risk. If you’d like to see how we can help you eliminate this risk from your retirement plan, along with other retirement tips and strategies, then be sure to click here and speak with a financial professional today.
