At least 10 types of investment risk exist, and there's no way to eliminate all of them. Playing it safe can be risky too, however. So the question isn't whether to take a risk, but what kind to take.
Risk tolerance varies from person to person and can change over time with changes in your personal and financial circumstances. You need to assess your risk profile by evaluating whether you consider yourself to be conservative, moderate or aggressive in your approach to investing.
Types of investment risk
Of the many kinds of investment risk, most investors only worry about one: the risk of losing money. With all the media hype about financial markets and the ease of checking on your returns, it's easy to see why investors can become fixated on market swings.
Market risk. Market risk is the risk of losing money when the financial markets go down. When investors think of losing money, they're thinking about volatility. Volatility can be especially uncomfortable when prices fall steeply or remain down for a long time.
There are 3 strategies for combatting market risk: diversification, asset allocation and rupee-cost averaging.
Inflation risk. Inflation is a loss in the value of what a rupee will buy. And the fact that you can't see inflation eroding your principal makes it all the more dangerous.
For long-term goals such as retirement or your child's college education, your biggest risk may be inflation. If your money doesn't grow enough, you won t be able to stay ahead of inflation. If you are conservative and solely select investments whose primary objective is to preserve rather than grow capital, you are especially at risk.
The main strategy for combatting inflation risk is to include stocks in your portfolio, which means accepting some volatility. Growth and volatility go hand in hand—you can't have one without the other. Falling short of your target for a long-term goal can be worse than living through market ups and downs.
|