3 kinds of investment risk you should note

When I was a boy we had a huge avocado tree in our backyard, and I liked climbing and swinging in its branches. A slip and a fall meant scrapes and bruises, but that was usually about all that happened. The climbs seemed thrilling. The risks seemed minimal. I’m alive today and in one piece.

Of course, not everyone is comfortable with heights. It’s similar with investing. Comfort levels vary from person to person and from investment to investment. Some investors are risk averse. Others tolerate volatility in their investment accounts. My work as a wealth manager is focused on planning. It includes helping my clients understand their tolerance for risk.

Still, risk is a funny thing. Investors often say that they “like taking risks.” But, I find those same investors are often not risk-oriented when the markets swoon. What can help is to know the various risks you are taking. Here are the main risks that my clients’ portfolios face:

  • Inflation Risk. The risk that the real purchasing power of money will lag behind the true cost of goods and services.
  • Market Risk. The risk that general movements in the markets can increase and decrease the value of specific investments.
  • Capital Risk. The risk related to the quality of each of the financial assets held.

Note that I have not included Speculative Risk. This is because I advise my clients to plan for a smart investment program, rather than to speculate on the markets. A long-term approach reduces the temptation to go off a good plan and to try and beat the markets by timing your investments.

Other risks relate to economic cycles and are harder to plan for: Interest Rate Risk is the risk rates could change; Governmental Risk is the risk that relates the enacting of new laws and regulations. Both types of risk can affect company and market performance.

Please remember that all investments involve the risk of a potential loss. Investors may receive less upon selling than the original amount. Before investing, my clients are advised to consider their investment objectives, risk tolerance and the expenses associated with a particular investment.

I don’t expect investors to be swinging from the trees precariously. I do expect them to understand basic risk types and to develop a sound financial plan to deal with them.

Here is some information from the SEC on risk tolerance and risk and investment decisions. Also, my article on investment volatility may be of interest. Call my office if you have questions or would like to discuss this in more detail.