Investments can make or lose money in various ways. Don’t let risk frighten you. Everything in life involves risk. The rewards of investing are worth the risks. The average annual return for the stock market since 1937 is 10.6%, with 77% of years resulting in positive returns versus negative ones.
Financial Risk
The financial risk of stock investing is that you lose money if the stock price decreases or goes to zero, as the company may go bankrupt. Financial risk is always a concern, even when the economy is doing well. Doing your homework and using common sense can help you reduce your financial risk.
Learn from History
The Nifty Fifty captivated investors for the better part of the 1960s. These were deemed “one-decision” stocks meant to be bought and not sold, but had P/Es as high as 100. Then, the stock market collapse of 1973-74 occurred, during which the market fell by 45% in just two years. The Nifty Fifty revived high-risk investing, which had been out of vogue since the Crash of 1929.
The dot-com boom of 1995–2000 was a period of significant, rapid, and ultimately unsustainable increases in the stock market, specifically in the valuation of shares in Internet “dot-com,” technology companies, and “start-ups” with little or no profits or unrealistic business models. Between March 2000 and October 2002, the Nasdaq fell from 5,048 to 1,139, erasing nearly all of its gains during the dot-com bubble, and most publicly traded dot-com companies had failed.
The 2008 financial crisis developed gradually. A reckoning was due for a years-long binge fueled by cheap credit. Home prices began to fall in early 2006. Subprime lenders began to file for bankruptcy in early 2007. Two significant hedge funds failed in June 2007. Losses from subprime loan investments caused a panic that froze the global lending system in August 2007. In September 2008, Lehman Brothers collapsed, marking the largest U.S. bankruptcy in history. The market declined by more than 20% in a single week.
In 2018, investors chased marijuana stocks, many of which fell sharply in 2019 to 2020. From 2021 to 2022, investors were in love with electric vehicle (EV) stocks, but most declined significantly in 2023.
In 2025, AI-related stocks are capturing attention. Dot-com stocks were essentially Wall Street investment bankers selling hope and dreams to the public. AI is a large technology company that invests its own capital in expenditures. However, self-dealing between these technology companies and debt financing is a concern, and valuations continue to rise.
What to do for beginners?
Investment fads typically run their course quickly and often end poorly. Avoid investing in hot stocks for short-term gains. Conduct thorough research and purchase stocks of solid, profitable companies. The lure of an easy buck and greed can blind investors, leading them to discard common sense. Don’t make bad decisions just because a stock sounds good, is popular, or is pushed by family or friends.
Don’t try to time the stock market by selling, then trying to get back in. Stay fully invested. Don’t chase rapidly climbing stocks and be last to the party. Just keep rotating to safer and proven stocks. If something sounds too good to be true, it probably is.
This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.