Investment Risks To Be Aware Of
Do you know what type of risks you are comfortable taking when you are investing your money? Working with a good investment advisor can help you out in order to build a solid retirement account for you to live off. Not too many people realize that there are a lot of risks out there with retirement investing. You need to know what type of investments you want to work with and to choose the accounts that can give you nice returns. Your risk tolerance will make a big difference when it comes to choosing the right type of accounts to use. You also need to be able to understand the risks that come with the economy and the various investments that are out there.
There is the interest rate risk. This happens when you invest in something like a savings account only to see the interest rate drop quickly in a few months. This is frustrating on many different levels! You signed up for an account with an interest rate of 5% or more only to see it fall below 1%! The problem is that the Federal Reserve will set the interest rate, which is why it can drop dramatically. You need to be able to understand that it will drop and to focus on signing up for the account with the higher interest rates in order to see decent returns. Stick out your investments even with low interest rates. History shows that the interest rates will eventually recover! Continue adding money to your savings account as it will keep earning interest money.
Another risk to consider as you are investing is the inflation risk. You always need to prepare your investments for times when things are hard such as is the case with inflation. The value of the dollar will drop as there is too much money in circulation. You need to be able to have some investments that are going to be protected and safe against inflation and to always plan your investments for inflation to occur. A way to help yourself in the future is to convert to a Roth account over a traditional account. This means you will pay taxes now instead of in the future. Doing this saves you money as inflation will eventually increase the tax amount in the future.
When you invest your money you are likely thinking that you will keep it in the account for a long time. There are moments when you will need to pull it out for an emergency but there are other things that happen as well. What happens if you have investments that are locked up?You won't be able to get to the money without facing a penalty for doing so. What can you do if you have money in accounts that are not liquid? This is a risk that you need to take when you invest. This is also why you have to diversify and have your money in other accounts as well such as online savings accounts. They pay a higher interest rate and you can pull out the money when you need it.
Liquidity risk also refers to your loss of money when the economy turns. You will have loss of stock and other things if the selling price drops thanks to the economy. If you need to get out of the accounts, you are going to be forced to rake a big loss.The current market value can make it hard since the selling price is dramatically reduced based on the total amount of money that you chose to invest in the first place.