As Stock Market Soars, Investors Must Prepare for Risks

 
The stock market is experiencing a surge. Riding the wave of artificial intelligence (AI), major stocks, including semiconductors, are consistently reaching new highs. The KOSPI index is also breaking historical records, leading to frequent assertions in the financial sector that "this time is different." In a rising market, stories of profitable investors spread quickly, encouraging more people to enter the market late. However, this optimistic atmosphere is precisely when investors should assess their risks.
 
Amid this backdrop, individual financial situations are becoming increasingly precarious.
 
According to the Supreme Court Administrative Office, personal rehabilitation applications reached 39,952 in the first quarter of this year, a 13.1% increase from the same period last year (35,325 applications). This marks the highest number on record for the first quarter. Personal bankruptcy applications also hit 10,434, the highest since 2021.
 
Various factors, including financial hardship, economic slowdown, and high interest rates, have contributed to this situation. However, cases of excessive investment and borrowing for investment purposes are also deteriorating individual financial health. Investors with insufficient spare cash find it particularly challenging to withstand sudden market fluctuations. While borrowing may seem like a way to grow assets in a bull market, it can become a burden that disrupts lives during a downturn.
 
Recently, the head of the Financial Supervisory Service likened single-stock leveraged ETFs to a gambling table, stating, "In the end, the one who collects the fees makes the most money." Although the expression was blunt, the message was clear. Investors may engage in frequent trading, hoping for greater returns, but the entities that benefit most from increased trading are the financial companies collecting the fees.
 
This does not imply that leveraged products are inherently problematic. If investors fully understand and can manage the associated risks, they can be effective investment tools. However, there are growing concerns that the line between investing and speculation is becoming increasingly blurred in the current market. As stories of significant short-term gains gain attention, the fear of missing out (FOMO) intensifies, leading more investors to engage in leverage and margin trading.
 
In a bull market, it is easy to believe that all investment decisions are correct. Profits are seen as a reflection of skill, while risks are underestimated. However, the stock market has a history of repeating this pattern. Downturns can arrive much more swiftly than anticipated, and those who rely heavily on leverage are often the first to feel the impact.
 
Stocks are not guaranteed financial products. If investors utilize margin loans or engage in margin trading, losses can exceed the initial investment. Forced liquidation and additional margin requirements can quickly erode assets. A single poor decision can lead to the loss of years of accumulated wealth and even result in debt.
 
This is not to suggest that the current market is unfavorable. The domestic stock market continues to show positive trends, supported by improved corporate earnings, policy expectations, and growth in the AI sector. A strong market presents numerous investment opportunities. However, a favorable market does not justify reckless investing, nor does an optimistic outlook eliminate the need for risk management.
 
Significant losses take much longer to recover from than gains. Losing 50% of an investment requires a 100% return to return to the original asset level. This simple calculation underscores the importance of loss management.
 
Therefore, it is essential to balance optimism with caution. Even if the market appears positive, one must remember that unexpected volatility can arise at any time. Investors should avoid leveraging beyond their means and think carefully before borrowing to invest. The fundamental principles of managing risk through sufficient cash reserves and diversified investments become even more critical in a strong market.
 
The market will continue to experience cycles of ups and downs. No one can predict how long the current bull market will last. However, it is clear that the hotter the market, the less visible the risks become. Ultimately, investors who remain in the market for the long term will encounter more opportunities.