s an investor, you’ll always need to deal with risk of some kind. But how can you manage the risk that’s been made clear by the recent volatility in the financial markets? The answer to this question may depend on where you are in life.
Let’s start with the risks associated with investing. There’s not a single investment risk because different types of investments carry different types of risk. Here’s a look at three investment categories and some of the risks connected with them: Stocks – When you invest in stocks or stockbased mutual funds, you will incur the risk that the value of your investments may decline. Stock prices can fall for any number of reasons – lower-than-expected earnings, a change in management, change in consumer tastes, and so on. Although the historical trend for stocks has been positive, there will always be periods when prices are down. One way to help defend against this volatility is to hold stocks for the long term, rather than constantly buying and selling, and to own a mix of stocks from different industries and even different countries.
Bonds – When market interest rates rise, the value of your bonds can decline because investors won’t pay full price for them when they can get the newer ones that offer higher rates. Another type of risk associated with bonds is credit risk, which essentially describes the risk that the bond issuer may default, potentially disrupting your flow of interest payments. However, you can help mitigate this risk by purchasing investment-grade bonds that receive the highest credit ratings from independent rating agencies.
