Investing always means taking a risk, but not every investment carries the same level—or even the same type—of risk. As an investor, you should be familiar with the different forms of risk that can affect your portfolio, including the following.
- Company risk. Stock and bond values drop due to a company’s internal problems or investors’ changing attitudes about its products and services.
- Market risk. The overall value of stock or bond market drops, taking most investments down with it.
- Interest-rate risk. Bond and bond fund values drop due to changing interest rates.
- Credit risk. Bond issuers fail to make regular interest payments or fail to repay principal upon maturity.
- Currency risk. Exchange rates fluctuate and affect the value of overseas investments.
- Inflation risk. Some low-risk investments—although not Treasury Inflation Protected Securities (TIPs) or I Bonds—with lower returns fail to outpace the rate of inflation.
- Diversification risk. Portfolio money is concentrated in too few investments that drop in value.
- Employer stock risk. Retirement savings are tied too closely with primary source of income—if one goes badly so does the other.
Of course, you don’t face all of these risks with the same investment at the same time. Rather, risks tend to be cyclical, with one risk posing a serious threat in some periods but very little in others. For example, rising interest rates haven’t been a risk in the last several years. In contrast, company and market risk have had a strong negative impact on stock values.
Liquid Assets
When it comes to assessing risk, you should consider the investment’s liquidity, or how easy it is to buy or sell the investment. For example, you can always sell stock in large corporations at the current market price, though you may lose some principal if the price has dropped since your purchase. Real estate, on the other hand, is not liquid because you must wait to find a buyer and negotiate the price. |
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