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66 Don’t Make Me Say I Told You So

Specific Risks of Investing in Stocks

Financial Risk – There is the risk that the companies in which
you are investing perform poorly, don’t grow enough, lose

money, or go bankrupt. If you own stocks in companies that
experience adversity, you can lose all or part of your investment.

This is why I recommend that investors use stock mutual funds,
exchange-traded funds (ETFs), or professionally-managed stock

portfolios (managed money accounts) to provide diversification
and reduce risk.

Interest Rate Risk – When interest rates go up, the stock market
is impacted, usually in a negative way. Rising interest rates

increase the cost of borrowing for companies and individuals.
When companies have to pay higher interest rates for capital

purchases or borrowed money, their profits may drop. This will
usually cause the stock price to drop.

Rising interest rates usually hurt the economy as a whole,
which hurts the stock market. When interest rates go up, the rate

that people have to pay on credit cards, mortgages, and other
borrowed money goes up. This usually means a slowdown in

the economy, a drop in corporate profits, and declining stock
prices. Rising interest rates also make fixed-income instruments

(bonds, CDs, etc.) more attractive to investors, so less money
flows into the stock market and keeps stock prices from rising.

Chapter 3: You Must Have Growth In Your Portfolio