When considering investments, risk is the chance that your investment will provide lower returns than expected. Here are some of the different types of risk to consider when choosing investments:
- Market Risk: when an investment loses because of overall declines in the market - for example, your house may be well kept and even improved, but its market value may have declined during the recent recession
- Inflation Risk: when prices in the economy rise as a whole, decreasing the worth of investment income
- Default Risk: when an entity issuing a debt investment (i.e. a bond) is unable to pay as promised
- Liquidity Risk: what value could you lose during the time you try to sell an investment? Common stock of a Fortune 500 company has low liquidity risk, since a sale order could typically be executed instantaneously. A 17th century vase may take longer to sell, and if you need the proceeds immediately, you might need to settle for a lower offer.
- Political Risk: when changes in governments or politics adversely affect markets or investments you hold
- Exchange Risk: when you hold foreign investments, changes in foreign currency valuations can adversely affect your investments.
One of the keys to successful investing is to understand the various risks you face, and to take steps or choose investments that help mitigate those risks.
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