Article Outlines Forms or Risk For Investing, Savings
Risk, according to Merriam-Webster, involves the “possibility of loss or injury.”
Coins in jar with saving, retirement and emergency plan labelsWhen it comes to managing savings or investments, it’s best to understand the nature of the risks that are out there. Lt. Col. Shane Ostrom, a certified financial planning retired from the U.S. Air Force recently listed some of the more common ones in an article on the website of the 00Military Officers Association of America
These include:
Inflation risk. Your money is worth less over time due to inflation. This is a very common form of risk that we readily accept. This form of risk is dangerous because it is sneaky. Your principal does not decline so you don’t see the deterioration of your account value. This risk exists in accounts where the interest rate does not offset the impact of inflation or taxes.
Interest rate risk. Fluctuating federal interest rates impact bond values. If you buy an individual bond and hold it until maturity, your bond value is stable, however what has inflation risk done to your bond’s value? If interest rates go up to 4 percent and you are holding a 3-percent bond, your bond is worth less if you try to sell it.
Liquidity risk. When you can’t buy or sell an investment when needed for cash or quick enough to prevent a loss. Typically this applies if you are trying to sell an investment when the price is falling or you need the cash quickly for an emergency. This risk is usually associated with thinly traded securities, investments where there is not much buying and selling.
Reinvestment risk. The inability to get out of one savings vehicle and into another without a loss of cash flow. A typical example here is a CD or a bond matures and the only available CDs and bonds have lower interest rates.
Market risk. The value of your investment hinges on a market direction. Everyone’s afraid of their portfolio value decreasing in a down market. Owning an investment that is linked to a market enhances this form of risk.
Transferred risk. Not assuming a financial risk yourself but decide to buy insurance to transfer the risk elsewhere. The common forms of transferred risks are life, medical, home and auto insurances. Only the wealthy and some companies tend to self-insure; assume the financial risks themselves.
