Understanding Investment Risk

What Is Investment Risk?

Simply put, risk in investing is the probability of a loss or a return less than what was projected. Generally, the amount of risk you assume is proportionate to your amount of potential return. The greater the potential return for an investment, the more risk you may end up assuming—and different investments carry different amounts and types of risk.

One key point to understand, however, is that all investing bears some form of risk and potential for loss. It is essential to understand the different types of risk and your affinity for risk so that you build a financial plan that reflects the risk level you are willing to take on.

Different Types of Risk

There are a few key different types of risk:

• Inflation. All investments tend to be affected by inflation, the general increase in costs that diminishes the value of your returns.
• Stocks & Bonds. If the company you invest in fails, or if the company’s stock price is volatile and decreases significantly, you risk facing a loss on your investment. Additionally, interest rate changes can significantly affect the return you may receive from bonds.
• Liquidity Risk. Many investments are subject to liquidity risk, the inability to find a market to purchase or sell your securities.

Risk-Mitigation Tactics

There are ways to help reduce the amount of risk you assume when investing. Key strategies include dollar-cost averaging, diversifying your portfolio, and acquiring insurance:

• Dollar-cost averaging, or a constant dollar plan, involves reducing your exposure to volatility by making regular, periodic purchases in an equity investment.
• Diversification involves spreading out your risk by making investments in a variety of different assets, reducing the potential loss you may incur from any one failed investment.
• You can help mitigate your overall financial risk by acquiring insurance products like annuities or life insurance. Insurance can help to limit financial the impact of an accident, illness, or other unforeseen event.

Contact Us

Every investment strategy starts with understanding your risk profile and developing a plan that aligns with your risk preferences. At The Templeton Group in Columbia, SC, our financial advisors can help you understand the various types of risk your investments carry, how your investments fit into your overall financial plan, and what strategies can help you to mitigate and manage your investment risk.