Will My Stock Portfolio Go Down?

When it comes to investing in the stock market, there’s always the potential for losses as much as there is for gain.
However, forearmed with the knowledge of what catalysts and forces might negatively affect your portfolio, you can make decisions today that will mitigate the worst of their effects further down the line.
Here, we focus on five key risk considerations that, if you prepare for them in advance, will maximize your chances for long-term success.
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1. Foreign Exchange Risk

If a company decides to trade its stock on a foreign exchange, its shares become subject to exchange rate risk.
In fact, several types of risk are associated with doing business internationally, including economic risk, jurisdiction risk, transaction risk, and translation risk. These risks can all affect a company’s stock price for better or for worse.
For instance, foreign exchange transaction risk is the risk that a firm will incur losses due to fluctuations in foreign exchange rates. This risk is most commonly associated with firms that conduct transactions in multiple currencies.
Still, it can also affect firms with only domestic operations if their suppliers or customers are based in a different country from the one in which they operate. The risk arises from the fact that exchange rates can change unpredictably and rapidly, making it difficult for firms to protect themselves against potential losses.
Foreign exchange risk is generally managed through hedging strategies, such as forward contracts, options, or currency swaps.

2. Market Liquidity

Liquidity impacts how easy it is for an asset can be bought or sold on the open market. A stock with high liquidity is easy to trade, while a stock with low liquidity may be more difficult to sell.
Indeed, the negative aspects of low liquidity are often most sharply felt when the market is in decline, especially when investors are desperate to offload their stocks as quickly as possible. If there are few buyers in the market for a given company, finding someone willing to buy your stock at the price you desire can be challenging.
Moreover, a thinly traded stock isn’t just one that lacks volume – it can also be a lot more volatile too. Volatility is another risk factor in investing since it makes it hard to predict the market and thus manage your portfolio.

3. Macroeconomic factors

Macroeconomic factors are those that affect an economy as a whole.
These elements can be internal, like the level of overall economic activity, or external, like international trade agreements. Macroeconomic factors are essential to consider when making investment decisions because they can significantly impact the health and stability of an economy and the profitability of the businesses operating within it.
In fact, there are several specific macroeconomic factors that can affect the value of your stock portfolio.
One of the most important of these is a nation’s gross domestic product (GDP). GDP is a measure of the total value of all goods and services produced in an economy, and the metric is closely studied by economists from all around the world. It includes everything from farmers and factory workers to bankers and CEOs, providing a broad snapshot of a country’s economic health.
It’s also crucial for stock prices too. Indeed, many analysts believe that strong GDP growth is necessary for sustained stock market gains. That’s because as the economy expands, so too do corporate profits. And when profits are growing, share prices tend to go up as well. Conversely, when GDP growth slows or even contracts, stock prices typically stagnate or fall.
Another important factor is the unemployment rate. If more people are unemployed, they will have less money to spend, leading to lower stock prices.
Inflation is also a factor to watch, as it can eat away at the value of stocks.
Finally, government debt levels can also affect stock prices. If the government borrows a lot of money, that could lead to higher interest rates and lower overall stock prices.

4. Federal Reserve Policy

The stock market is extremely sensitive to any policy decisions made by the US Federal Reserve’s Federal Open Market Committee (FOMC). Indeed, one of the most important responsibilities the FOMC has is to determine the federal funds rate.
The federal funds rate is the rate at which depository institutions – such as banks and credit unions – lend to other depository institutions on an uncollateralized basis. The federal funds rate is significant because it affects almost all other kinds of interest rates, including credit cards, auto loans and mortgages.
However, interest rates are also important to the stock market because they can greatly affect the overall economy. If interest rates go up, it can make borrowing money more expensive and thus reduce spending. This can lead to a decrease in demand for goods and services, which can then lead to decreased production and lower stock prices.
Conversely, if interest rates go down, it can make borrowing money cheaper and spur economic activity. This could lead to increased production and higher stock prices. So, while rising interest rates may be good for savers, they might also be bad for the stock market too.

5. Business Risk

The assets you hold in a portfolio are themselves exposed to certain risks. This is called business – or company – risk, and is a kind of unsystematic risk that can adversely affect stock prices and cause you to lose money.
These business risks can come from various sources, including the failure of a company’s products or services to meet customer expectations, or the poor implementation of management decisions.
While some company risk is always inherent in any investment, specific steps can be taken to mitigate these risks. Diversifying your portfolio across different companies and industries is one way, as is including some non-correlating assets such as bonds, real estate and commodities.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.