Investing in securities such as stocks, bonds, and mutual funds offers attractive returns but also comes with various risks. Successful investing is not just about expecting profits – the key is understanding and managing risks, which include market, credit, and inflation risks.

Market Risk

Market risk means that the value of investments may fall due to changes in financial markets. These changes can be caused, for example, by rising interest rates, inflation, economic recession, or geopolitical conflicts. For instance, during the pandemic in 2020, the S&P 500 index fell by more than 30% in just six weeks before markets recovered.

How to mitigate it:

• Diversification: Spread investments across different asset types. For example, keep part of the portfolio in tech stocks such as Microsoft, part in bonds, and part in real estate funds.

• Long-term horizon: History shows that markets tend to grow. For example, the average annual return of the S&P 500 index over the last 50 years has been around 10% despite occasional downturns.

Credit Risk

Credit risk concerns bonds and refers to the possibility that the bond issuer (usually a legal entity issuing and selling securities) may go bankrupt and fail to meet its obligations. In 2022, for example, the U.S. company Bed Bath & Beyond (a major American retail chain) went bankrupt, meaning that investors in its bonds lost a significant portion of their investments.

How to mitigate it:

• Issuer ratings: Bonds rated AAA by agencies such as Moody’s or Standard & Poor’s have the lowest risk. On the other hand, “junk bonds” with lower ratings, such as BB or B, promise higher returns but are riskier.

• Diversification: Invest in bond funds containing hundreds of different bonds, which reduces the risk of loss from one issuer.

Inflation Risk

Inflation risk means that the return on investment does not keep pace with inflation. For example, in 2022, inflation in the Czech Republic reached 15%, meaning that an investment with a 5% return actually lost 10% of its real value.

How to mitigate it:

• Inflation-protected assets: Invest in stocks, real estate, or inflation-linked bonds, such as U.S. TIPS or Czech government bonds with inflation-adjusted yields. For example, in 2022, the return on U.S. TIPS exceeded 6%.

• Long-term investing: Stocks tend to outperform inflation over the long run – for example, Apple’s stock value has grown more than 1,000-fold over the past 20 years.

Other Risks

Other risks include liquidity risk (difficulty selling an investment), currency risk (foreign exchange rate fluctuations), and political risk (government measures affecting markets).

For example, in 2023, the U.S. government imposed restrictions on chip exports to China, which impacted technology company stocks.

Key Recommendations

Successful investing requires:

1. Diversification: Spread your portfolio across different asset types and regions.

2. Analysis: Consider economic trends, corporate results, and geopolitical factors.

3. Patience: Remember that short-term declines are not a disaster – the key is a long-term approach.

These rules will help you reduce risks and increase your chances of achieving your financial goals.

A long-term approach and regular portfolio monitoring also play a significant role. At Stone & Belter, we help investors reduce risks and significantly increase their chances of reaching their financial goals. With us, you don’t have to fear investing – we’re happy to help.