Types of Investment Risk
Many people save for retirement with the expectation that their accounts will grow in value over time. This growth may be the result of their consistent contributions as well as earnings like interest, dividends, and price appreciation. However, investing involves risk as there are no guarantees that your portfolio will perform well. In this article, we’ll provide you with some insight to examine some common investment risks.
What is Risk and Reward?
In investing, risk can be thought of as the possible downside or loss, while reward is the potential gain. Generally, the more uncertain the outcome, the greater the range between the risk and reward. Each investor must determine the point at which they are willing to accept losses for a chance at a greater reward, or conversely, the point at which they value security more than the potential gain.
Why is Managing Risk Important?
You have saved for retirement for decades and should not take the chance of severe portfolio declines when you need it the most. Postponing retirement or going back to work may not be a desirable option. Having reasonable expectations and a plan in place should give you peace of mind that you are on the right track even through market ups and downs.
What Types of Risks Could Impact My Portfolio?
Economic Risk - There are many risks resulting from the economic environment and world events. The buying and selling of investments is a function of supply and demand, which affects the price one might be willing to pay. Currency exchange rates, tariffs, and the availability of raw materials and labor are factors that could affect market prices.
Creditworthiness Risk - The chance that the entity issuing a bond will not be able to repay the principal at maturity or the scheduled interest payments is a type of credit risk. If you own stock, the financial condition and profitability of a company is another example that could affect the value of their shares.
Liquidity Risk - There is a risk of being unable to sell or cash in your investment at the time you desire. For example, some REITS (real estate investment trusts) may cap the number of shares available for liquidation, collectibles may have a limited market for resale, and bank certificates of deposit may have a hefty penalty for early withdrawal.
Inflation Risk - Inflation erodes your ability to purchase the same item over time. As prices rise, your fixed income may not go as far when you lose your purchasing power.
Emotional Investing - Some investors make changes to their portfolio based on things like fear, greed, or reacting to misleading information. Ignoring investment fundamentals and careful analysis could be detrimental to your investment results.
Let PFM Create Your Investment Plan
At PFM, we start by getting to know our clients and their comfort level with investing. As a fiduciary, we recommend a portfolio that is in your best interest and aligned with achieving your retirement goals and financial needs. Let our team of professionals create a retirement plan that takes the guesswork and stress out of investing. Contact us today to schedule a no-obligation meeting to learn more.