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10 Attributes of Investment Risk

When you invest, you are taking some risk.

So if you think you don’t like risk or you think you don’t have any risky investments, then look again. You are taking some risk when you invest.

Below are 10 attributes of Investment Risk:

1. Market Risk

This is the ups and downs of the market. When the market experiences big swings up and down, especially down, this can make a lot of folks sick. The sicker it makes you feel the more you should look at your portfolio and adjust it so you can handle the wild swings of the market. This could mean that you invest a higher percentage of your portfolio in bonds, which are a less risky type of investment.

2. Inflation Risk

The cost of living goes up. If you invest in something that returns 2% and inflation goes up 4% then you’ve lost 2% of the value in your investment. My parents and parents-in-law thought they would be able to live their retirement years with $100,000.00. Back then, 1930s thru 1940s, $100,000.00 made people feel they were rich forever.

3. Opportunity Risk

Opportunity Risk is when you decide to invest in one type of investment, you’re also deciding not to invest in others. So if you commit money to a certain investment and it goes down in value, you’re stuck in that investment and are not able to participate in another investment that might be more attractive.

This is especially apparent when you purchase your own bonds for instance. You could be stuck in a 10-year bond and you want to get out because of high interest rates. You would then be forced to sell for a loss. It’s much better to invest in bond funds because the fund manager has the ability to invest in many different types of bonds.

4. Reinvestment Risk

Reinvestment Risk has to do with timed investments like CDs and bonds that you purchase yourself. A mutual fund manager has the ability to diversify a portfolio of these types of investments by selecting from a larger basket of different types of CDs and bonds to reduce the risk.

5. Concentration Risk

Diversification, Diversification, Diversification. Don’t concentrate your investment dollars in one type of investment. Read my article here on Diversification.

6. Interest Rate Risk

When the Fed messes around with the interest rates moving them up and down, the markets react. The value of bonds go up when interest rates go down. The value of bonds go down when interest rates go up. Keeping a well diversified portfolio will reduce the affects the Fed’s have on your portfolio.

7. Credit Risk

The Credit Crunch” is what we’ve been in lately. The financial sector has taken a hit. The financial sector includes lenders like Countrywide Bank. On another note, I’m watching that sector with everyone else because it just might be getting ripe to pick. Since I write about options at this site that’s how I’d play it if something comes up that looks interesting.

8. Marketability Risk

Having the ability to sell you investment(s). This pertains to a low interest in stocks, bonds or CDs that you may personally own. By “low interest” I mean not enough buyers. This is reduced immensely if you invest in a mutual fund.

9. Currency Translation Risk

The value of the dollar goes up and down in the international market depending on what country. This is one reason why it’s good to just have 10% of your portfolio in the international market.

10. Timing Risk

The market goes down and you feel uncomfortable about it so you sell one of your investments that you shouldn’t sell – bad timing.

What to do

Invest in mutual funds and you’ll reduce a lot of this risk. Not completely, but enough to make you sleep at night while your money is working hard for you.

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