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The Business Forum Journal

 

Recognize Risk in All Its Forms - Then Learn to Manage It

 

Stock market 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.

Here’s an overview of the some different types of investment risk you may encounter as an investor.

Market risk This is the possibility that the value of a security will move in step with the overall market.

Inflation risk 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.

Credit risk 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.

Currency risk Changing currency values can impact international investments. If the value of the dollar decreases, for example, it may increase the value of foreign investments.

Liquidity risk 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 quickly.

A Helping Hand
Fortunately, there are a number of tools that can help you to gauge risk. Here are two that measure market risk.

Beta 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.

Standard deviation 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 volatility.

Risk and risk measurements can be complex. Contact a qualified financial professional to find out how these risks apply to your portfolio.

 


Brian M. Clay is a Fellow of The Business Forum Institute and the President of Clay, Malek & Northam Wealth Management in Southern California; whose clients include both companies and individuals.  He has been recognized for numerous honors and accomplishments including being named to the Consumer Research Council of America's "Best Financial Planner" list.  Brian's professional registrations include the Series 6, 7, 24, 63, 66 held with LPL Financial, and CA Life & Health Insurance.  He also holds the Chartered Mutual Fund Counselor (CMFC) and CERTIFIED FINANCIAL PLANNER™ (CFP®) designations. The CFP® designation is considered by most to be the highest certification in the industry.  To be recognized as a CERTIFIED FINANCIAL PLANNER™, individuals must meet rigorous experience and ethical requirements, complete financial planning coursework, and pass a certification examination covering the financial planning process, risk management, investments, tax planning and management, retirement and employee benefits, and estate planning.  They must also meet ongoing continuing education requirements and uphold the CFP® Board Code of Ethics and Professional Responsibility.  Brian is an LPL Registered Principal.  Securities and Financial Planning Services offered through LPL Financial, A Registered Investment Advisor – Member FINRA/SIPC.  For a list of states in which he is licensed to do business, please visit www.cmnwealthmanagement.com.  Brian holds a Bachelors degree in Economics from the University of California, Los Angeles (UCLA).


 Visit Brian's Web Site  ~  http://www.cmnwealthmanagement.com/

Contact Brian at:  ~  Click Here


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