Markets are have been quiet over the past few weeks, now may be a good time to assess the risks in your portfolio. All investments carry risk. But, as an investor, one of the biggest risks you face is not achieving your long-term goals, such as enjoying a comfortable retirement and remaining financially independent throughout your life.
To help reach your goals, you need to diversify your investments and each carries its own type of risk. By diversifying your investments you may be able to reduce the overall volatility in your portfolio. (Keep in mind, though, that diversification can’t guarantee a profit or protect against all losses.) To diversify your risk, you first need to recognize them. Here are some of the most common types of investment risk.
Market risk — This is the type of risk that everyone thinks about — the risk that you could lose principal if the value of your investment drops and does not recover before you sell it. All investments are subject to market risk. You can help lessen this risk by owning a wide variety of investments from different industries and even different countries.
Inflation risk or purchasing power — If you own a fixed-rate investment, such as a Certificate of Deposit (CD), that pays an interest rate below the current rate of inflation, you are incurring purchasing power risk. Fixed-income investments can help provide reliable income streams, but you also need to consider investments with growth potential to help work toward your long-term goals.
Interest-rate risk — Bonds and other fixed-income investments are subject to interest-rate risk. If you own a bond that pays 4 percent interest, and newly issued bonds pay 5 percent, it would be difficult to sell your bond for full price. If you wanted to sell it prior to maturity, you might have to offer it at a discount to the original price. However, if you hold your bonds to maturity, you can expect to receive return of your principal provided the bond does not default.
Default risk — Bonds, along with some more complex investments, such as options, are subject to default risk. If a company issues a bond that you’ve bought and that company runs into severe financial difficulties, or even goes bankrupt, it may default on its bonds, leaving you holding the bag. You can help protect against this risk by sticking with “investment-grade” bonds and steering clear of high yield or junk bonds.
Liquidity risk — Some investments, like real estate, are harder to sell than others. Thus, real estate is considered more “illiquid” than many common investments.
It’s important to understand the type of risk carried with every investment you own. Diversifying may not ease all the ups and downs of investing but will most likely eliminate the size of the peaks and valleys you will experience along the way.
If you have questions or you would like to review the risk in your portfolio, contact Greg Burns at Entrust Wealth Management by calling (607) 223-4024 or visit them at www.entrustwealthmanagement.com for a complimentary review.