Investment Risk Basics
Investing is just like everything in life – for every upside, there’s a potential downside. If you’re ready to start investing, you need to understand the types of risk you will face as well as potential returns. First, evaluate your own needs and goals, and then decide how much risk is right for you. To do this, you need to understand the various types of risk and what they mean.
Here are some common types of risk associated with investing:
- Market Risk – When you invest in the stock market, there is a chance that your investment will decline in value. Therefore, you would lose part of your initial investment. It is also possible to even lose the entirety of your investment.
- Inflation Risk – In some cases, the value of a long-term asset (such as a government bond), may not grow enough to keep pace with inflation. This would reduce your purchasing power.
- Credit Risk – Sometimes the issuer of an investment (e.g., a stock) doesn’t live up to its financial responsibilities. This means that you could lose the capital you’ve invested and any interest payments you expected to make.
- Liquidity Risk – With some types of investments, such as real estate, it is possible that you won’t be able to liquidate the asset when you want and at the price you want. If this happens, you’ll be forced to either hold the asset or accept a lesser price in order to liquidate it when you want.
- Economic Risk – The economy as a whole can suffer a downturn, resulting in loss of investment values across the board. An economic downturn impacts everything from board prices to the job market.
- Tax Risk – Tax policy can make certain investments less profitable for both businesses and private investors.
- Social/Political Risk – Social unrest in certain areas or political decisions could create a downturn in the market and impact your investments.
How much risk can you tolerate? Ask yourself this: Are you willing to tolerate more risk for a higher potential return? Or, would you rather have a consistent return that emphasizes quality with less risk? There are several factors to consider as you think about your level of risk tolerance:
- Financial goals
- Your age
- Your family situation
Over time, your risk tolerance and financial goals are likely to change. It’s important to talk with an Investment Advisor Representative to make sure your investment choices evolve along with your objectives. If you’d like to build a portfolio that can produce the returns in keeping with the amount of risk you’re willing to assume, contact a Uwharrie Investment Advisors Representative.