The term risk often gets thrown around in the investment world. But this term goes far beyond market volatility. Here are five types of risk to consider and you put together a portfolio:
Interest rate sensitivity risk
As bond yields have been on the decline, this has become an especially important type of risks for investors. It is a measure of how much the price of a fixed-income asset will fluctuate in response to interest rate changes. Securities sensitive to this risk tend to have larger price fluctuations than other securities.
A hot topic lately, especially with new trade directions out of the US, but overall it’s the risk associated with government or social action that could result in loss of value. Political risk can impact an investor both nationally and internationally.
Since bond yields have fallen they have decreased in popularity which means the credit curve is affected as well. The lower the credit curve, the more a portfolio risk increases.
Purchasing power risk
Using bonds as an example, if inflation rises and an investor has invested in shorter duration bonds with a lower return, it is likely they are trading equity market risk for inflation and overall, losing purchasing power.
A portfolio that is based on an investment style that includes a focus on one sector can be extremely vulnerable. If this sector experiences any kind of downturn, a portfolio could be significantly negatively impacted. In conclusion, while investing is not a game of certainty, understanding the fuller spectrum of risk helps ads some important safeguards.