Recognize Risk in All Its Forms
- Then Learn to Manage It
conditions in recent years have been an
eye-opener for many investors. Whether
the market is going up or down, it’s
more important than ever to educate
yourself about risk so you’re better
prepared to cope with it.
overview of the some different types of
investment risk you may encounter as an
This is the possibility that the value
of a security will move in step with the
This is the risk that an investment’s
return won’t keep pace with the rate of
inflation. More conservative investments
may be subject to higher levels of
inflation risk. To determine whether an
investment is staying ahead of
inflation, subtract the annual inflation
rate from its annual return.
Interest rate risk
When interest rates go up, bond prices
go down and vice versa. This may not be
a concern to investors who buy bonds and
hold them until maturity.
This is the risk that a bond issuer
won’t be able to pay interest due or
repay principal. Bonds with lower credit
ratings have higher credit risk, but may
also yield higher returns.
Changing currency values can impact
international investments. If the value
of the dollar decreases, for example, it
may increase the value of foreign
The easier it is to sell an investment,
the lower the liquidity risk. With more
illiquid assets — real estate, for
example — you may receive a lower price
than desired if you need to sell
A Helping Hand
there are a number of tools that can
help you to gauge risk. Here are two
that measure market risk.
weighs a security’s volatility in
relation to the market as represented by
a benchmark, such as the S&P 500. The
“beta” of the benchmark is equal to 1.0.
So an investment with a beta higher than
1.0 is more volatile than its market
index and one with a beta lower than 1.0
is less volatile.
measures the amount by which an
investment’s returns — over the past
year, for example — have varied from its
long-term average. The higher the
standard deviation, the more an
investment’s returns have diverged from
the average. The potential result? More
Risk and risk measurements can be
complex. Contact a qualified financial
professional to find out how these risks
apply to your portfolio.