What should I know about investment risk? – Sentinel of the South Platte
When you invest, you take risks – you can’t avoid it. But the concept of “risk” may be broader than you realize. And by understanding the different types of investment risks and how those risks can be handled, you can improve your skills as an investor.
The most common perception of investment risk is simply the risk of losing money. When you invest in stocks and equity-based vehicles, such as mutual funds, there is no guarantee that your capital – the amount of your initial investment – will be preserved. Generally speaking, if you hold stocks or mutual funds for years, or even decades, you can reduce the likelihood of incurring losses that could reduce the value of your investments to zero. Hopefully the value of your investments will increase over time. And it’s worth noting that since the Great Depression, U.S. stocks have averaged 9.59% annual returns, according to Morningstar Direct, an investment research service. However, past performance cannot guarantee future results.
Either way, this type of risk is real, and it’s a factor to consider when making your investment decisions. But you can’t avoid all the risks by avoiding stocks and investing your money in other types of investments. Consider obligations, for example. When you buy a bond, you usually receive regular interest payments and get your original investment back when the bond matures, provided the issuer does not default. But if interest rates go up and you want to sell your bond before it matures, you will have to offer it at a “discount” because no one will pay the full price of your bond when they can. buy new ones at a higher price. rate.
You can help manage this type of interest rate risk by owning a variety of bonds with different maturities. When interest rates rise, you can reinvest your short-term bonds at the new, higher rates. And in a declining rate environment, you can still profit from your longer-term bonds, which typically pay higher interest rates.
Foreign or international investments also involve specific risks. When you buy foreign stocks, you will find that fluctuations in the value of currencies against the US dollar can affect your returns. In addition, international investments may involve political risks, as some foreign governments and political systems may change in ways that adversely affect businesses in those countries. To contain these types of risks, you will need to maintain an appropriate allocation of international holdings and diversify among regions.
Ultimately, your broadest defense against all types of risk is building a diversified portfolio that contains U.S. stocks, international stocks, corporate bonds, mutual funds, government securities, and other investments. Diversification works because it helps reduce the impact that market volatility can have on your portfolio if you only own one type of asset, like national stocks. (However, diversification cannot guarantee profits or protect against all losses.) And you will also want your portfolio to reflect your individual tolerance for risk.
By being aware of the different types of risk and taking steps to mitigate them, you can create a strategy that has the potential to help you achieve your important goals, such as a comfortable retirement. And in doing so, you’ll avoid the biggest risk of all: not investing for your future.
This article was written by Edward Jones for your local Edward Jones financial advisor. Edward Jones, member of the SIPC.