Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity. The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation Inflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index. Inflation erodes the purchasing power of money over time — the same amount of money will buy fewer goods and services.
Inflation risk Inflation risk The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Shares offer some protection against inflation because most companies can increase the prices they charge to their customers. Share Share A piece of ownership in a company. But it does let you get a share of profits if the company pays dividends. Real estate Estate The total sum of money and property you leave behind when you die. The risk that your investment horizon may be shortened because of an unforeseen event, for example, the loss of your job.
This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose money. The risk of outliving your savings. This risk is particularly relevant for people who are retired, or are nearing retirement. The risk of loss when investing in foreign countries. When you buy foreign investments, for example, the shares of companies in emerging markets, you face risks that do not exist in Canada, for example, the risk of nationalization.
Review your existing investments. Which risks affect you? Are you comfortable taking these risks? Always know the latest news on investor initiatives and research, educational resources and fraud warnings by signing up for our newsletter. View past issues.
Market risk The risk of investments declining in value because of economic developments or other events that affect the entire market. Equity Equity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. In general, as investment risks rise, investors seek higher returns to compensate themselves for taking such risks.
Every saving and investment product has different risks and returns. Differences include: how readily investors can get their money when they need it, how fast their money will grow, and how safe their money will be.
In this section, we are going to talk about a number of risks investors face. They include:. With a stock, you are purchasing a piece of ownership in a company. With a bond, you are loaning money to a company.
Returns from both of these investments require that that the company stays in business. If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds. If you are a common stockholder, you get whatever is left, which may be nothing. If you are purchasing an annuity make sure you consider the financial strength of the insurance company issuing the annuity.
You want to be sure that the company will still be around, and financially sound, during your payout phase. Large company stocks as a group, for example, have lost money on average about one out of every three years.
Market fluctuations can be unnerving to some investors. You can unsubscribe at any time. Help us personalize your experience. Knowing your investable assets will help us build and prioritize features that will suit your investment needs. Over 10 Billion. Larry Swedroe Nov 25, Yet despite this wisdom, many individuals hold concentrated positions in a single stock when they could easily diversify away that idiosyncratic, single-company risk.
Which, then, begs a critical question: given the proven benefits of diversification, why do so many investors hold portfolios with heavily concentrated positions? Compensated vs. Uncompensated Risks. Good risk is the type you are compensated for taking.
Investors get compensated for taking systematic risks, or risks that cannot be diversified away. The compensation comes in the form of greater expected returns not guaranteed returns, or there would be no risk.
Bad risk is the type for which there is no compensation. So Why Does This Happen? I will provide several behavioral explanations for this phenomenon, as well as the reason for why the behavior is a mistake that can prove very costly. Among the behavioral errors that lead to concentrated positions are: Confusing the familiar with the safe.
Familiarity breeds overconfidence, leading to an illusion of safety. In contrast, the lack of familiarity breeds the perception of high risk. Overconfidence also leads to underestimating downside risks. Employees are often overconfident regarding the outlook for their own firm.
0コメント