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Types of risk

Types of risk. Investments may decline in value. 4. Types of risk. Investment risk. Market volatility is the fluctuation of the value of investments. Market risk. Market risk/market volatility. Market risk/market volatility. The market continues to grow despite downturns.

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Types of risk

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  1. Types of risk

  2. Investments may decline in value 4 Types of risk Investment risk

  3. Market volatility is the fluctuation of the value of investments. Market risk Market risk/market volatility

  4. Market risk/market volatility The market continues to grow despite downturns *Source for index data: Commodity Systems, Inc. as of October 2012 Past performance of an index is not an indicator of future results.

  5. The rising cost of goods and services Inflation risk First class stamp1 Movie ticket2 Car3 Year 1985 Current 20254 cost $0.22 $0.46 $0.76 cost $3.55 $7.93 $12.45 cost $11,838 $30.748 $45,604 1 Postal Rate Commission, usps.com (March, 2013). 2 National Association of Theater Owners, natoonline.org (2011). 3 Autoblog.com (March, 2012). 4 Assumed inflation rate of 3.5%.

  6. The loss in purchasing power Inflation risk Erosion of purchasing power In 25 years $100,000 will be worth the equivalent of $47,761 today assuming 3% annual inflation or $29,530 assuming 5% annual inflation. Represents a 3% annual inflation Represents a 5% annual inflation $100,000 $80,000 $60,000 $40,000 $20,000 $86,261 $74,409 $78,353 $64,186 $55,368 $61,391 $47,761 $48,102 $37,689 $29,530 0 5 10 15 20 25 Source: Standardandpoors.com (2011).

  7. Interest rate risk Interest rate risk • As interest rates rise, the value of bonds generally falls As interest rates decline, the value of bonds typically increases

  8. Foreign investment risk Foreign investment risk • Things to consider: • Currency and exchange rates • Political factors • Global economics

  9. Domestic versus foreign investment returns Foreign investment risk Represents when the U.S. returns outperformed foreign returns Represents when foreign markets outperformed U.S. markets Source: Standardandpoors.com (2011)

  10. Investor error risk Investor error risk Not monitoring account Procrastination Underestimating your needs Timing the market

  11. Points to remember Investment risk is the risk of losing money on investments Interest rate risk is the potential decrease in the amount of interest you are earning on fixed income investments Market risk is the fluctuation of the value of investments Despite market downturns, the value of the market has grown Foreign investment risk is the risk of foreign markets not performing well Investor error risks are those within your control Inflation risk is the risk of your money being worth less

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