Should You Be Afraid of a Stock Market Crash?

US stocks have been on a tear over the past 6 years, with the S&P 500 index of large US stocks returning over 200% since its nadir in March 2009. Such a lengthy bull market can lead to concern about when it will inevitably end; after all, stock markets tend not to rise forever. But if such fear leads you to hoard cash rather than invest it, you’re likely making a mistake, particularly if you have a long time horizon for your portfolio.

Topics: Blog Stock Market Risk

How to Think Like a Long-Term Investor

For investors concerned about what will affect the long-term growth of their portfolio, it can be difficult to focus on the right issues. Most financial news stories are produced for traders and others in the financial industry who are interested in daily market movements. After all, their paychecks can depend on what goes up and what goes down. But for long-term investors, the implications of what’s happening can be very different. Here are a few interesting—and perhaps counter-intuitive—ideas for long-term investors to keep in mind amid the din of financial markets:

Topics: Blog Risk Volatility Valuation

Reacting to a Stock Market Decline

The last month has been a rough one for the stock market. The S&P 500 index of large US stocks has fallen by more than 7% in the last four weeks (as of the end of the day on October 16th), and many international stock markets have fared even worse. Such a sizable decline can be painful, especially since stocks in general have done so well since the end of the global financial crisis in 2009. But sticking to your long-term strategy, rather than panicking and trying to change things up in response, is (as usual) probably the right way to react.

Topics: Blog Stock Market Risk

How to Determine the Right Amount of Risk

We recently discussed the importance of sticking to a set risk level. But what should that risk level be? Since more risk can result in larger potential gains but also larger potential losses, correctly answering this question is one of the most important parts of successfully managing your wealth.

There are two key factors that should determine your risk level. The first is how much risk you are able to take. The second is how much risk you are comfortable taking. While these two ideas sound similar, they can often be very different.

Topics: Blog Risk Goals

Sticking to a Set Risk Level

When the stock market is rising—as it has been for much of the past 5 years—it’s common to think that you should be taking more risk with your investments. When the stock market goes down, it’s common to think the opposite. But constantly shifting around the amount of risk you’re taking in response to how financial markets are doing is a recipe for poor long term performance. A better idea is to take a longer-term view of the risk you want for your portfolio and stick to that risk level.

Topics: Blog Risk Goals

Understanding Diversification

Having a diversified portfolio is one of the keys to successfully managing your wealth. But while the idea of diversification may seem simple—putting all your eggs in one basket generally isn’t a good idea—it’s often misunderstood.

Simply having a lot of different investments doesn’t necessarily mean you have a diversified portfolio. Having a large number of stocks that are all in the same sector of the market—a lot of technology stocks, for example—doesn’t offer much diversification: if something happens to that sector, all of the stocks could decline at the same time.

Topics: Blog Risk Diversification

Avoiding the Low Volatility Trap

Stock market volatility—how much the market goes up and down on a daily basis—has recently been unusually low. Since July of last year the S&P 500 index of large US stocks has gone either up or down by more than 1% on only about 12% of trading days, compared to a historical average of more than 20%.

Topics: Blog Stock Market Risk Volatility

The Basics of Interest Rate Risk

Unlike with individual stocks, whose values can soar or plunge depending on the latest headlines, the payoffs from investing in bonds tend to be more predictable. Most bonds offer a set of periodic interest payments, with the initial principal returned when the bond matures. But that doesn’t mean that bonds—even bonds issued by the US government—are risk-free. Since (for typical bonds) the payments are set in stone when the bond is first issued, changes in interest rates can dramatically affect how much these payments are worth.

Topics: Blog Risk Bonds Duration Interest Rates

The Danger of Company Stock in 401(k) Accounts

When you’re thinking about how to select investments in your 401(k) account, there are often many options to choose from. Most of these are diversified mutual funds that each contain hundreds or thousands of stocks or bonds (or sometimes both). Many companies, however, also include a much less diversified investment option in their 401(k) plans: stock in the company itself. It’s an investment option that’s best avoided.

Topics: Blog Risk Retirement Enron Diversification 401K

Are Treasury Bonds “Risk-Free”?

The term “risk-free” is often used to describe treasury bonds issued by the US government. Yet in recent years Congress has repeatedly hesitated to raise the legal limit on the amount that the federal government is allowed to borrow, sparking panicked legislative deal-making to keep the government from defaulting on some of its debt. After one of these episodes, in 2011, Standard & Poor’s even lowered its credit rating for the US government. After this political buffoonery, should you still consider treasury bonds to be riskless? The answer is that from an investors’ perspective, treasury bonds were never risk-free.

Topics: Treasuries Blog Risk Bonds Debt Ceiling