Unless
you’ve been living under a rock since New Year’s Day, you should be
well aware of the tumultuous events that have been taking place around
the world – the disaster in Japan and the uproar in the Middle East and
North Africa are just a few global measures that are causing economic
changes around the globe.  We’ve seen gas prices soar and a rise in food
and beverage commodities, but the place in which these changes are
especially apparent is the stock market.  Inflation has caused investors
to shift their assets and determine which of the world’s financial
markets are being hit the hardest with higher interest rates and a rise
in inflation.  If you have any game pieces playing in the stock market
you’ll surely want to know which markets are being affected by the
ever-changing economic fundamentals.  Let’s discuss the possible risks
that your portfolio faces, and aim to strengthen any weak spots.

First
off, let’s discuss the risks you must consider – inflation and interest
rates.  These are two of the biggest factors to put into perspective
when considering stock market choices.  Currently, higher energy and
commodity costs are sticking it to both consumers and producers.
 However, the big question that investors need to mull over is how much
of these high prices are due to speculation.  Instead of looking at
speculations in the stock market, it’s crucial to consider supply and
demand realties,  and how they will subsequently affect inflation, and
in turn interest rates.  Possible solutions to market volatility and the
risk of rising inflation and interest rates starts with broadly and
efficiently diversifying your portfolio.  Here are some suggestions of
market choices to invest in during this time: U.S. and international
stocks, commodities, inflation-protected bonds, real-estate investment
trusts and cash, all of which have the ability to withstand inflationary
bouts.  

Next,
let’s discuss the risks you must anticipate – war, disasters, political
and economical upheaval and social unrest.  While the stock market is
extraordinarily resilient, and has been fighting against all the shocks
in 2011 so far with great momentum, it’s hard to say whether it will
continue to stand firm against the current troubles in the Middle East
and Japan that are disrupting the technology, automobile, and oil
industry.  Possible suggestions for anticipating these risks include
adding gold and other precious metals to your portfolio, as well as
implementing hedge-fund-like long-short strategies, which attempt to
generate stock-market returns, but with lower risk.  Essentially, you
bet that some investments will rise while others will fall.

Of
course, we must discuss the risks that never go away – markets and
companies.  Yes, market risk is inescapable, but don’t view your
portfolio like betting at a horse race – because the favored winner may
inevitably lose horribly.  The key to market strategy is diversification
and implementing a safety margin.  Keep these three risks that all
investors should understand in mind: valuation risk – overpaying for an
asset, fundamental risk – buying something that turns out to be flawed,
and financing risk – using leverage.  Other suggestions include avoiding
concentration in similar stocks and mutual funds, as well as never
overlapping markets or sectors.  

Finally,
a risk you must fear is that of playing it too safe.  It’s a difficult
balance to find – risk it all and you could end up with too many losses,
risk too little and you could be in danger of not having enough money
in later years, and of missing major market advances.  Any suggestions
for not playing it safe simply revolve around going around your
judgments and taking small risks that yield small returns.  Hopefully
then you’ll start to feel more confident in your investing strategy.
 Unless you can predict the future, it’s crucial to embark on a strategy
that will preserve capital in a period of heightened volatility.
 Simple steps like assessing risk, identifying opportunities and looking
past the present and into the future can shed light on how to handle
the markets twists and turns.  And even though the future of the stock
market can never be certain, at least you can equip your portfolio with a
nice safety net. 

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