Is Investing Risky?

Because virtually every investment carries some degree of risk, it is critical that you assess your tolerance for risk. If you are the sort of person who will lie awake at night worrying about your investments if you put most of your money in the stock market, then you might want to consider balancing your portfolio with lower-risk investments, such as Treasury bills, highly rated bonds or other lower-risk investments.

Here are a few types of risks associated with investing:

Systematic Risk

systematic risk reflects that the performance of an individual security will be impacted by the performance of the overall market. recessions, wars, significant political events can all impact an individual stock. This cannot be avoided even you put your money into buying stocks of different industries(diversification).

Market risk

Economic factors may cause segments of the financial markets and any investments within those segments to fall in value.

Strategy:

1. Allocate your assets so you own investments that respond differently to various economic factors.
2. Avoid panic selling and locking in losses when prices are low if the investments’ long-term prospects are still good.

Interest-rate risk

The market value of an existing bond may fall if interest rates decrease because newly issued investments will pay higher rates than older bonds.

Increases in interest rates can potentially lower the demand for stocks to the extent that newly issued bonds or other interest-bearing products with higher coupons allow investors to take less risk for a competitive return.

Strategy:

1. Diversify with short and mid-term bonds and bond funds, since they’re less sensitive to interest-rate changes.
2. Hold individual bonds to maturity.
3. Ladder your bond portfolio across three or four bond issues with different maturities.

Inflation risk

As inflation rises, the value of fixed-rate investments, such as bonds and CDs, declines, because their interest rates aren’t adjusted to keep pace.

Strategy:

1. Allocate a percentage of your long-term portfolio to stock and stock funds to outpace inflation.
2. Allocate a portion of your portfolio to inflation-linked bonds.

Currency risk

As the U.S. dollar rises in value, the value of overseas investments may decline, and vice versa.

Strategy:

Diversify both domestically and abroad in both developed and emerging markets.

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Political risk

Political instability in the global economy can affect the value of domestic and international investments.

Strategy:

Allocate a percentage of your portfolio to products that are less vulnerable to market turmoil

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Nonsystematic Risk

Unlike systematic risk, nonsystematic risk generally won’t impact an investor’s entire portfolio. For example, corporate scandal, poor management, and changing technologies could impact a single stock, but not all the stocks you have bought. The best protection against non-systematic risk is portfolio diversification. Don’t put all your eggs in one same basket.

As a careful investor, you can do something to prevent this from happening. For example, by thoroughly researching and find out some companies whose disappointing sales and earnings records suggest they aren’t poised for long-term success.