Understanding Risk
When you invest money you are accepting different amounts and
types of risk. Some investments are considered less risky
than others, but no investment is without risk. Some of the
main types of risk you should understand are:
Interest
rate risk
Income-generating investments, such as corporate bonds,
certificates of deposit, and so forth come with the risk that
interest rates could possibly fall or rise. If they fall, you
might earn less after the investments mature and you try to
reinvest the money. If they rise, the value of your account
could drop. Furthermore, inflation may be going up as well, so
your income might not go as far. Rising interest rates can
also hurt stock prices since companies have to pay more to
borrow money.
Market
risk.
Whenever interest rates rise, bond yields drop, or other
events take place, the stock and bond markets react. Some
events cause markets to rise, and others cause the markets to
fall. These are rarely predictable, adding another element of
risk to investing.
Political
risk.
If a country goes to war, implements an embargo, or has a
change of government, there may be an effect on markets, and
often on inflation and interest rates, too. Again, this is an
area of risk that is hard to plan for, but can affect your
investments.
Inflation
risk.
This is a field of risk that can be better managed than
others, but still affects you—perhaps more than any other
area. If the majority of your retirement income comes from
dividends and interest, and inflation rises, your effective
income falls, and that hurts.
Credit
risk.
CDs are
FDIC insured for up to $100,000 per account, while corporate
bonds are backed by the financial stability and credit of the
issuing company. Should a company go bankrupt, secured
creditors are typically first in the asset
distribution/liquidation priority, followed by the
bondholders. Shareholders are typically last in priority.
You can
help manage risks by:
-
Spreading your money among several different asset classes.
This way, if one group is adversely affected by the market
or other conditions, another one may possibly react just the
opposite (asset allocation will not guarantee against the
risk of loss in a declining market).
-
Become
familiar with the types of risks within your portfolio. For
instance, do you own several mutual funds that have large
holdings in the same stock? This could unnecessary expose
you to an over-concentration risk if that particular company
runs into problems.
Overseeing investments involves more than picking the best
performing current assets. It also includes managing risks to
help preserve your money. If you are not sure whether you are
minimizing risks in your portfolio, please check off and
return the enclosed coupon.
For a
free illustration on how the lifetime income from an immediate
annuity can add to your
retirement planning,
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