Key Takeaways
- You’re probably aware that there are risks associated with investing, but you may not know what all of those risks are.
- There are risks not only with stocks, but with cash and bonds as well.
- Having an understanding of the risks around investing can help you think about how to diversify your investments.
If you’ve ever gone skydiving, you’ve had to sign a form stating that you understand the risks associated with jumping out of an airplane. You likely had someone explain those risks to you. Maybe you understood the risks, maybe you didn’t, but if you went ahead with it, you ultimately decided that those risks were minimal.
There are degrees of risk with just about everything in life. Investments are no different – whether it’s cash, bonds, or stocks, there is risk associated with each category.
Starting with cash, you may be surprised to learn there is risk associated with it. Perhaps you have a savings account where you’re earning under one percent in interest. Where’s the risk in that? Well, the risk with cash is inflation. If inflation runs at two or three percent, then your buying power with that cash decreases. Now, that’s okay, to an extent, because you need cash to spend on various expenses, and it serves an important purpose, but it’s not completely riskless.
Next is bonds. You may have AAA-rated bonds, investment-graded bonds, government bonds, and T-bills. The risk with these is in interest rates. As interest rates move up, the value of your bond can go down, so that were you to sell the bond, you may end up with less money than what you bought it for. As interest rates change, the amount of principal you have in a bond could be at risk.
Finally, there’s equity risk. This is one where most people are aware there are risks. When it comes to stocks, it’s understood that if a company does poorly or becomes obsolete, and you have stock in that company, you could lose everything you invested in that stock. Most people are familiar with this risk, but they balance it with knowing that there’s usually a very large reward associated with a stock if the company does well. We help reduce the risk associated with stocks by ensuring we’re well-diversified and not investing everything in one stock.
So whether you’re considering jumping out of an airplane or looking to invest your money, make sure you take some time to understand your risks and proceed accordingly. Until next time, enjoy.
