Types of investment risk
If you are an investor it is very important to understand the inherent risks.For most of the investing market it is felt that investing in stocks is a risky business. It is important to keep in mind that there are some risks you have some control over and others that you can only guard against. The best defense against investment risk is making thoughtful investment selections that meet your goals and risk profile and to keep individual stock and bond risks at an acceptable level. However, it should be understood that there other risks that are inherent to investing that you have no control over. Most of these risks affect the market or the economy and require investors to adjust portfolios or simply ride out the storm. Here are four major types of risks that investor's face and some strategies, where appropriate for dealing with the problems that can be caused by these market and economic shifts.
- Economic Risks-Probably the most obvious risk of investing is that the economy can go bad. There can be market busts and other significant events that affect the market and can cause a downturn that lasts for year. If you are a young investor financial experts recommend that the best strategy is just to wait ride out these downturns. In addition if you can increase your position in good solid companies, these downturns are often good times to do so. In addition foreign stocks can be a bright spot when the domestic market is in the dumps if you do your homework.This is the time to realize that some U.S. companies earn a majority of their profits overseas thanks to globalization.If you are an older investor then this type of downturn can hit you much harder. If you are in or near retirement, a major downturn in stocks can be devastating if you have not shifted significant assets to bonds or fixed income securities.
- Market Value Risk-This is the type of risk that happens when the market turns against or ignores your investment. This can happen when the market goes off chasing the "next hot thing" and leaves many good, but unexciting companies behind. Some investors may find this a good thing and view it as an opportunity to load up on great stocks at a time when the market is not bidding up the price. On the other hand, it can be difficult to watch your investment flat-line month after month while other parts of the market are going up. The lesson here is to not get caught with all you investments in one sector of the economy. By spreading your investments across several sectors, you will have a better chance of participating in growth of some of your stocks at any one time. Remember that diversification has its
- Inflation-This acts like a tax on everyone. It destroys value and creates recessions. Although some people believe inflation is under our control, the cure of higher interest rates may at some point be as bad as the problem. Investors historically have retreated to "hard assets" such as real estate and precious metals, (especially gold), in times of inflation. It is important to remember that inflation hurts investors on fixed incomes the most, since it erodes the value of their income stream. Financial experts advise that stocks are the best protection against inflation since companies have the ability to adjust prices to the rate of inflation.
- Being too conservative-You should keep in mind that there is nothing wrong with being a conservative or careful investor. However, if you never take any risk it may be difficult or even impossible to reach your financial goals. Beginning investors should understand that they may have to finance 15 to 20 years of retirement with your nest egg. Keeping it all in savings instruments may not get the job done.