Setting Up a Business Plan – How to Determine Risks
Posted by admin in Strategic Planning on September 30, 2011
THE INVESTMENT RISK TYPES
It is very important to know and understand the various types of risks involved with investing in securities. So let’s look at some real life examples of these types of risks. First, let’s review risk in general, which is the chance that an investment’s actual return will be different than the expected return. Investors are mainly concerned with losing money when they think of risk. Now let’s look at some of the different types of risk present in investing.
There is MARKET risk. Market risk is the day-to-day potential for an investor to experience losses from fluctuations in securities prices. This risk cannot be diversified away. It is referred to as systemic risk. An example is what we went through recently. All the markets were weak because the whole system was weak; everything was losing value because the entire system was in peril. Just about everything lost value, stocks, corporate bonds, currencies, etc. So even a well diversified portfolio lost value due to overall market weakness.
Next, there is UN SYSTEMIC risk. UN systemic risk is also known as specific risk or classifiable risk. Think of it as Industry risk or Sector risk. A real life example is if you owned 20 stocks but they were all technology stocks. You might think you are diversified because you own 20 stocks, but you are not diversified sector wise. You are diversified in the tech sector but if the tech sector suffers a downturn in spending and profits, then more times than not, all your tech stocks will go down in value, not just a few. You could reduce, or diversify away, this industry specific risk by investing in stocks outside the technology sector. Read the rest of this entry »