An Introduction to Personal Risks in Stock Investments
Frequently, the risk involved with investing in the stock market isn’t directly related to the investment; rather, the risk is associated with the investor’s circumstances.
Suppose that investor Ralph puts $15,000 into a portfolio of common stocks. Imagine that the market experiences a drop in prices that week and Ralph’s stocks drop to a market value of $14,000. Because stocks are good for the long term, this type of decrease usually isn’t an alarming incident.
Odds are that this dip is temporary, especially if Ralph carefully chose high-quality companies. Incidentally, if a portfolio of high-quality stocks does experience a temporary drop in price, it can be a great opportunity to get more shares at a good price.
Over the long term, Ralph will probably see the value of his investment grow substantially. But what if Ralph experiences financial difficulty and needs quick cash during a period when his stocks are declining? He may have to sell his stock to get some money.
This problem occurs frequently for investors who don’t have an emergency fund to handle large, sudden expenses. You never know when your company may lay you off or when your basement may flood, leaving you with a huge repair bill. Car accidents, medical emergencies, and other unforeseen events are part of life’s bag of surprises — for anyone.
You probably won’t get much comfort from knowing that stock losses are tax deductible — a loss is a loss. However, you can avoid the kind of loss that results from prematurely having to sell your stocks if you maintain an emergency cash fund.
A good place for your emergency cash fund is in either a bank savings account or a money market fund. Then you aren’t forced to prematurely liquidate your stock investments to pay emergency bills.