Not many of us have the stomach for losing our money. So it is no surprise that when it comes to saving and investing the risks associated are often the most concerning piece. Truthfully, how many of you look at your investment statement and just note whether it went up or down. If it went up, you think you’re doing well. \u00a0If it went down, you question whether your strategy is working. There’s more to managing investment risk than just evaluating your periodic investment return, whether it’s up or down at the time you look at it.<\/p>\n
Understanding the various types of risk that may affect your savings and investments can help you better determine if your strategy is working for you. \u00a0You\u2019ll also better understand a strategy recommended by a professional advisor.\u00a0 Remember, the goal here is to make you more informed thus making you more comfortable in the financial decisions you make.<\/p>\n
So let\u2019s talk about some of the risks associated with saving and investing.<\/p>\n
Inflationary Risk <\/b>is the chance that your money today will not have the same purchasing power in the future.\u00a0 It means that if you don\u2019t earn interest (or enough interest) today, you won\u2019t be able to buy as much 10 years from now because the cost of goods like groceries and gas goes up over time (inflation).\u00a0 This is why when you invest over a long period of time it\u2019s essential to earn a return that at least keeps pace with inflation to avoid losing money (the future value of that money.)<\/p>\n
Business Risk<\/b> is risk specific to either one type of business or one particular company.\u00a0 \u00a0For example the risk that American Airlines could go out of business due to their own mismanagement. \u00a0This is why it is so important not to hold too much of any one company.<\/p>\n
Market Risk<\/b> is different from business risk in that market risk is related to the general economy or market and is affecting companies in a similar way regardless of how financially strong a company may be.\u00a0 For example, all airline companies likely suffer in a poor economy.\u00a0 You could even broaden that category to include all travel and leisure associated companies. \u00a0\u00a0The poor performance of the company\u2019s stock isn\u2019t due to the actual company\u2019s decisions; rather general market pressures are affecting it.<\/p>\n
Liquidity Risk <\/b>speaks to how quickly you can buy or sell an investment.\u00a0 You might be comfortable investing in real estate (actually purchasing property) but you have to consider how quickly you could sell it to raise cash.\u00a0 Other physical assets fall into this category, such as timber, gold, art, and collectibles.<\/p>\n
Reinvestment Risk<\/b> is specific to bonds or CDs.\u00a0\u00a0 It\u2019s the risk that when a bond matures or a CD renews that the interest rate will be less than what you originally were earning.<\/p>\n
Now that you have a basic understanding of these general risks in the next post we\u2019ll focus on how various investment vehicles and strategies are used to offset these risks.<\/p>\n
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