Market Risks: All Your Eggs in 1 Dropping Basket

Market risks are always present when you are an investor. If you are going to be an investor, you have to be able to deal with a certain amount of risk. Diversification can lower your risk, but it can not completely eliminate it. Here are a few things to consider about diversification and market risk.

Diversification

One of the basic principles of investing in the stock market is diversification. If you put all of your money into investing in a particular stock, you are taking a big chance. If that individual company goes out of business, you are essentially going to be losing your entire investment. By diversifying into several different companies and sectors, you can lower your overall risk. If one of the company goes out of business, you are not going to lose your entire portfolio. 

Market Risk

Even though you may diversify your portfolio by investing in many different stocks, you are still going to be subject to market risk. When your money is all tied up in the stock market, you are still taking a position of high risk. All of the stocks that you invest in could be negatively affected by the performance of the stock market as a whole. If the stock market crashed, your portfolio would crash right along with it regardless of how well you have diversified. Because of this, it is advisable to try to diversify your portfolio away from relying completely on the stock market.

Investing in Different Assets

Instead of trying to diversify only the stocks that you own, you should look at diversification as something that you want to pursue for your entire portfolio. In order to do this, you are going to need to devote a portion of your investment money towards other types of assets. There are many different things that you could potentially invest in that would protect you from stock market risk.

Commodities

One of the best ways to invest in something that is not tied to the stock market is to put money into commodities. Getting involved in the commodities market can be complex, but it will provide you with returns outside of the market. You could invest in many different types of commodities such as wheat, corn, soybeans or oil. 

Many investors choose to put a portion of their portfolio into precious metals. Investing in gold and silver can be a good way to protect yourself from a stock market crash. Even if the value of your stocks plummet and the value of the dollar plummets, the value of your gold is going to remain. 

Foreign Currencies

Another way that you could diversify your portfolio away from the stock market is to invest in foreign currencies. Investing in the Forex market allows you to take advantage of fluctuations in the exchange rate between 2 currencies. Although certain currencies are affected by the performance of the stock market, you could invest in currencies that operate independently from the US market.

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