Home » sin stocks » Sin Stocks Report: Summer Of Sin #9 — What Are Sin Stocks Risks Like?

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Rewards and risks are related. You should never look at one without the other. Previously we talked about what sin stock returns are like. Now we’re answering the question: “What are sin stocks risks like?

What Are Sin Stocks Risks Like?

Sin stocks investors love to talk about the returns. After all, studies show again and again that sin stocks deliver above-average returns. But every investor needs to balance reward with risk. You should never consider one without the other because an amazing reward may not be quite so amazing when you consider the risk involved, and you may be overlooking a seemingly moderate reward even though the risk is extremely low.

So, what are the risks of sin stocks like?

Every investment has risks associated with it, and sin stocks are no different. Here are some of the key risks that sin stocks (and other investments) have…

Market risk. This is the risk of being a publicly traded company on the stock market. The best example of market risk can be seen in The Great Recession of 2007. At the time, investors got skittish and started selling off stocks. Even stocks that may have been smart investments with little downside still saw price declines as worried investors threw the proverbial babies out with the bathwater. Just because a stock is strong doesn’t mean it is completely insulated against the overall performance of the market.

Business risk. This is the risk that businesses have of being in business. There could be a lower than expected results due to a drop in sales or an increase in costs or massive lawsuit or a big fire to burn the company to the ground. Just running a business brings risk, so the fact that sin stocks are businesses means that they face business risk.

Political risk. Political risk is the risk that governmental decisions will impact the company, which will impact that stock. For sin stocks, this is one of the biggest risks because governments frequently impose taxes, fees, and additional regulations on sin stocks that they do not impose on other companies. For example, cigarette manufacturers are extremely limited in terms of how they can advertise. Or another example: if the government ever re-introduced Prohibition then alcohol stocks would be tremendously devalued.

Consumer risk or trend risk. This is the risk that consumers will no longer be interested in the product or service of the company. For example, consumers tastes are changing for beer and gambling, as we’ve reported here on SinStocksReport.

Just because a risk exists doesn’t mean you shouldn’t invest. All investments have risk. Your goal as an investor is to look objectively at the investment through your due diligence to determine whether the rewards outweigh the risks.

DISCLAIMER

Nothing on this site is a recommendation because, hey, I can't read your mind and I don't know what you have in your portfolio, and I'm not a licensed financial advisor. So never EVER trade without doing your due diligence. If you want more information about this fascinating topic, please check out the Sin Stocks Disclaimer page which basically says the same thing but more emphatically.