Every investment carries some degree of risk. Risk is the chance that your investment will provide lower returns than expected. The more risk you're willing to take on, the higher your potential returns – and potential losses. That's why it’s essential to understand risk and learn ways to manage it. Below are a few examples of different types of investment risks.
● Market risk: An investment may lose value because of a general decline in financial markets due to one or more economic, political, or other factors.
● Inflation risk: Prices may rise in the economy as a whole, so your ability to purchase goods and services would decline.
● Credit risk: A bond issuer may not be able to pay its bondholders interest or repay principal.
● Interest rate risk: Increases or decreases in prevailing interest rates can result in price fluctuation of an investment, particularly bonds. As interest rates rise, the price of bonds falls; as interest rates fall, bond prices tend to increase.
Identifying and Assessing Risk
After understanding various types of risk, identifying and assessing risk is twofold. First, determine your personal desire to assume risk, comfort level with doing so, and financial ability to cope with possible losses. Next, become fully informed about an investment product before deciding to invest. You can find information from the company offering an investment, third-party business and financial publications and websites, annual and other periodic financial reports, and the Securities and Exchange Commission (SEC). Knowing this information will ensure your risk to reward ratio is appropriate for you. You can then manage your financial risk by diversifying.
Decrease Financial Risk by Diversifying
The best risk management strategy is to not put all your eggs in one basket. Because market changes don’t influence all types of investment assets at the same time or in the same way, you can offset risk by diversifying. Of course, diversification cannot guarantee a profit or ensure against a potential loss, but it can help you manage the level and types of risk you face.
Contact the Horizon Trust & Investments team or call (219) 873-2683 for help managing your investments and risks.