No matter how careful you are or how smart you are with your moves, investing always comes with some degree of risk. Whether you are engaging in short-term investing, like stock trading, or long-term investing, like a retirement account, you are at risk of losing money rather than gaining money.
Investing has a lot of great potential that makes it worth your time, especially when you balance out your portfolio and work with a financial planner who can help you reach your goals. However, it is important that you understand the risks involved before you get started.
Six types of investment risks
- Market risk — Market risk is a term that refers to the broad set of risks associated with a decline or crash in the stock market. This can cause your investment’s value to decline. If you are investing for retirement or a long-term goal, usually your investment has time to build back up. But, if you are close to retirement or reaching your goals, a market risk can be devastating to your portfolio.
Keep your portfolio diverse to help reduce the risk of losing a large chunk of your portfolio due to market risk. Never put all your eggs in one basket, because if that basket breaks, all your eggs come crashing out of it.
- Liquidity risk — Buying low and selling high is the fundamental principle of investing. However, if there is low buying interest, then you may not be able to sell your investment for your target price and may have to accept a loss.
- Inflation risk — An increase in inflation can lower the value of your investments. For example, if you have money in a savings account that generates 1% interest per year, and inflation increases by 3%, your actual return is 2% lower in relative value.
Investing for the long term in investments that can potentially beat the inflation rate can help reduce the chances of losing value due to inflation.
- Default risk — A default occurs when you invest in stocks or bonds with the intent of holding them to collect dividends and interest, but the company is unable to pay out. For example, you hold bonds in Company A, but Company A declares bankruptcy, which can mean your bonds are worthless.
Always do your research on a company before buying into stocks or bonds. You should believe in them; but remember, nothing is guaranteed.
- Horizon risk — Horizon risk refers to unforeseen events that may force you to sell off investments because you need cash. For example, you may have been holding some investments for long-term returns, but you lost your job and need cash.
- Longevity risk — Longevity risk refers to outliving your savings. It is great to live a long life, but failure to save enough for you to continue living your preferred lifestyle would be a real setback.
Talk to a ProVise CFP® professional about investing risks
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about investing? Contact ProVise today to schedule a complimentary consultation.