Hello everybody! I am with you again with interesting and useful posts about investments! Today I want to write about 5 terrible scenarios, which can negate all the efforts of the investor.
Investment risks Investment risks
Investments in the stock market, with a competent approach, can increase capital at times in the long term and bring passive income. Even inflation and bankruptcies of individual companies are not terrible for a diversified portfolio.. I'm not talking about ordinary market or stock drawdowns, which make inexperienced investors nervous.
The above are just flowers compared to the real threat of capital loss in the market, from which no strategy can save, perhaps the broadest possible diversification across countries and different asset classes. So what makes even the most seasoned investor shudder??
1. Nationalization of individual industries or the economy as a whole. Nationalization - transfer of land to the state, industrial enterprises, banks, transport or other property, privately owned. Even the mere mention of it can nullify the value of a stock..
The latest example is the restriction of the online education market in China.. New companies will only have to be non-profit, you cannot attract foreign capital or during an IPO, restrictions on the duration of lessons, etc.. Since the beginning of the year, shares of China's largest EdTech giants - New Oriental Education, TAL and Gaotu Techedu - Collapsed on 70-90%. There will be no recovery, if the policy of the authorities does not change.
There were also examples of nationalization in Russia in the past. for example, dispossession, carried out by the Bolsheviks in the period from 1925 until 1932 during the collectivization of agriculture. To 1917 of the year, by the way, in Russia, the Petrograd Exchange successfully developed with 1703 of the year. Guess, why closed?)
2. Changes in sectors of the economy. The economy does not stand still, it develops and changes, and along with it, industries are changing - new promising areas appear, and the old ones disappear. for example, people used to ride horses, they were replaced by horse trams, then trams appeared, then cars. If companies fail to adapt to new conditions, then they will disappear, what became, eg, with Kodak, once the largest company. These changes could affect entire industries., eg, someday the world will run out of oil and another type of energy will become the main type of fuel. Oil companies will either disappear, or adjust to new realities.
3. Economic decline in the country. The country can successfully grow and develop, but under a certain coincidence, the situation changes. The once promising growth and development are replaced by a long decline and decline. For examples, no need to walk for a long time. Greek market with 2008 years fell by 90%, has not recovered so far due to the unstable financial and economic situation in a country with a bunch of economic and political crises. Spanish market 1973-1983 yy. gave -70% profitability. The Italian market was in decline for 50% from 2008 years and only in the last 2 years began to show signs of recovery.
4. War. Large-scale military action can lead to unpredictable consequences not only in life, but also in the stock market. "If only there was no war" — definitely the motto of long-term investors, because. industrial enterprises can be destroyed due to large conflicts, reduced population, the financial system was destroyed and the country's debt burden increased. It is unlikely that in such conditions it will be possible to talk about economic growth in the coming decades.. Here, the restoration of the destroyed economy comes to the fore. Interestingly, American S&P500 for the war years 1941-1945 yy. grew by 35%, because. there were no military actions on the territory of the country.
5. Change of political regime or economic course. Here again China comes to mind with its uncertain course., then towards democratization, then in the direction of tightening its policy in relation to private companies. In our country in the 90s of the last century there was a widespread democratization of society, which gave impetus to the development of market relations. And in 1917 year, on the contrary, all manifestations of capitalism were brutally destroyed and the private sector was brought to naught. Therefore, any drastic changes in politics and economics can lead to serious consequences for the entire market., and hence for the investor's wallet.
The only defense against all these nightmares for an investor is the widest possible diversification by country and asset class., as I wrote above. The problem is, what if you have little capital, it is impossible to effectively scatter it across different countries and classes, so, as real estate and real investment. You can buy different ETF to different countries, but this implies service fees, a plus, it will hardly be possible to effectively manage and monitor all this.
I think, it makes sense to get serious about diversifying across countries and asset classes, if the capital exceeds at least a quarter of a million dollars. Therefore, at the moment I specialize mainly in one market - the Russian, to analyze it as efficiently and thoroughly as possible. Although I understand, that in the long term there may be risks, described in the post.
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