When it comes to investing, the word “risk” often carries a negative connotation. However, it’s important to break down the concept of risk in order to manage it effectively. By understanding the different types of risk and monitoring your investments, you can make informed decisions that may help you manage your money effectively. Menlo Asset Management – a California wealth management firm – shares some of the common risks that are crucial to any high-return investment.
Strategic investing isn’t about taking chances but rather making decisions based on your financial goals and risk tolerance. Long-term investing and diversification are two effective strategies for managing investment risk. However, it’s important to note that neither strategy can guarantee protection against investment loss.
The experts at the firm agree that the most important risk to consider is that of inflation, which refers to the danger of an increase in price over a period of time, reducing your purchasing power and returns from your investments. If your savings and investments are failing to outpace inflation, dividend growth-oriented alternatives may be worth considering – such as stocks, stock mutual funds, variable annuities, or other vehicles.
Another type of risk to be aware of is an interest-rate risk, which affects bonds and other fixed-income investments. When interest rates rise, the value of these investments tends to fall. Conversely, when interest rates fall, existing bonds may increase in value. It’s important to keep an eye on interest rates and their potential impact on your investments.
Economic risk refers to the impact of economic downturns on the earnings capabilities of most companies. While some industries and companies may adjust well to economic downturns, others may take longer to react. It’s essential to diversify your investments across different industries and companies to help manage this type of risk, and having a financial expert can help a great deal here.
Market risk affects almost all types of investments, including stocks, bonds, real estate, and others. When a market experiences a downturn, it tends to pull down most asset classes with it. However, affected securities may recover at rates more closely related to their fundamental strength. Historically, long-term investing has been a productive way to minimize the effects of market risk.
Finally, specific sock risk refers to events that may only affect a certain company. For example, the death of a company’s president may cause the value of the company’s stock to drop. While it’s impossible to predict all of these influences, diversifying your investments can help manage the effects of specific risks.
In summary, understanding the different types of investment risks and monitoring your investments can help you make informed decisions and manage your money more effectively. While there is no guaranteed protection against investment loss, long-term investing and diversification are two strategies that may help mitigate risk.