Safety on the stock markets
Wednesday July 23, 2008
Stock markets cannot really offer safety for any investment. If you wish your money to merely remain slightly ahead of inflation, then using high interest savings accounts will probably be more up your alley. If you are wondering why buying shares on stock markets is inherently risky, it is because stock markets are not so much risky as they are unstable.
Obviously, stock markets will generally not suffer from massive instability in most economical climates, but they are at best only a slightly predictable creature. It doesn't matter where the stock markets are located - the Australian stock market ASX, the Hong Kong stock market, or the London stock market - all stock markets will suffer from periods of instability from time to time. The broad effects of these periods of instability can often be forecast, but the devil is in the details. Predicting which areas will rise and which will fall is what is necessary to maximising profits and minimising losses.
When people talk about their investment portfolio, they mean the range of investments that they have made. As it is so difficult to predict which areas are likely to grow and which may fall, spreading investment out over many areas of potential growth is a way of dealing with the instability of stock markets. As stock brokers make educated predictions about which areas will grow based on current activities within various industries, the overall effect of a wide portfolio should be a reasonable level of growth, due to losses being minimised compared to high returns.
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