Whether they realize it or not, the number one fear of today"s investors is the fear of loss. Because of their fear, investors seek out "safe" investments, like insured savings, certificates of deposit and government and municipal bonds rather than "risky" investments like stocks, mutual funds, real estate investment trusts and precious metals, like gold. Investors may not realize these "safe" investments carry the same type of risks as the uncertain investments. It is important to understand that there is no such thing as a risk-free investment. Any investment falls into one or more of the following risk categories:
"Purchasing Power Risk: The investment does not keep up with inflation
"Market Volatility Risk: The market"s unpredictable ups and downs
"Security-Specific Risk: The specific investment will perform worse than other investment
"Liquidity Risk: The forced selling of an investment when its value is down.
"Event Risk: An unforeseeable, sudden event that impacts the economy
Although risk is an inherent part of any investment strategy, there are strategies to reduce the risk. Choosing what type of assets to invest in can reduce purchasing power risks. Inflation has had a devastating impact on fixed-income portfolios, so investors must be able to invest in stocks to deal with inflation. Common stocks have consistently proven their ability to increase at a rate higher than inflation.
Do not put all of an investment into the stock market, however, since dividing assets among different investment classes can reduce both security-specific and market volatility risks. Individual investments will react differently to the same economic conditions. Such economic conditions, like an inflation rate increase, could cause a decrease in some securities while increasing the value of other securities. Diversifying investments creates a balance in the investor"s portfolio and when a portfolio is balanced in this way the value of the overall portfolio should gradually increase over time, even if some securities lose value. Contacting a
Certified Financial Planner is the first step in creating an investing plan that eases your fears of financial risk.
