How many times have we heard or read about investment experts telling us that all investments have some risks associated with them. According to them, an investment without risk is really not an investment at all.
So, what exactly are some of the risks Laguna Beach residents take on when we invest our hard-earned money? Here are five types of investment risks:
• Unsystemic
• Systemic
• Interest rate
• Liquidity
• Inflationary
Unsystemic risk
Its name might sound like a medical term, but unsystemic risk refers to the strengths or weaknesses associated with the business or entity issuing the investment vehicle. For example, making money by investing in the stock or a bonds issued by a corporation depends upon its strength and long-term ability to grow. We can minimize the risk of the company failing by not investing in just one company.
Systemic risk
Systemic risk is associated with the overall marketplace as opposed to any one particular company. Factors such as national economic conditions may cause all stock prices to be affected by them. It may help to spread investment dollars out over different types of investment vehicles, such as:
• Stocks
• Bonds
• Currencies
• Real estate
Interest rate risk
Investing in securities that promise a fixed return rate can be risky when interest rates begin to climb. The bond that offered an attractive interest rate in October might not be as attractive nine months later as overall interest rates rise. Researching the influences on interest rates and anticipating where they will be heading is important when focusing on an investment.
Liquidity risk
Some investments are not as easy to cash out as are others. We can easily get out of an investment in Apple or Microsoft shares by simply calling our broker, but divesting ourselves of an investment in real property takes considerably more time. Keeping some money invested in securities that can be readily sold is a good hedge against liquidity risk.
Inflationary risk
There is always a chance that inflation can erode away at our purchasing power by reducing the value of our money. Inflationary risk simply means that the return on the money we invest in 2015 may not be worth the same by the time receive it in the future. Certain investments, such as convertible bonds, allow for appreciation to keep pace with or exceed inflationary cycles.
Want to learn more different types of investment risks? Contact Bart Zandbergen CFP® at (949) 297- 8318 or visit his website here.
