If you mention risk in today’s tumultuous market climate, most people probably think of their rapidly shrinking investment accounts. But in reality, investment risk takes many forms, and each can affect how you pursue your financial goals. The key to dealing with investment risk is to learn how to manage it – with help from your financial planner, of course 
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From my firm’s glossary of financial terms, they define risk as “the chance that an investor will lose all or part of an investment.” While investment risk does refer to the general risk of loss, it can be broken down into more specific classifications. Familiarizing yourself with the different kinds of risk is the first step in learning how to manage risk within your portfolio.
Types of Risk
Risk comes in many forms, including:
- Market risk: The likelihood that the value of a security will move in tandem with its overall market. For example, if the stock market is experiencing a decline, the stocks in your portfolio may decline as well. Or if bond prices are rising, the value of your bonds may also go up.
- Interest rate risk: Most often associated with fixed-income investments, this is the risk that the price of a bond will fall with rising interest rates.
- Inflation risk: This is the risk that the value of your portfolio will be eroded by a decline in the purchasing power of your savings, as a result of inflation. Inflation risk needs to be considered when evaluating conservative investments, such as bonds and money market instruments as long-term investments. While your investment may post gains over time, it may actually be losing value if it does not at least keep pace with the rate of inflation.
- Credit risk: This type of risk comes into play with bonds. It refers to a bond issuer’s ability to repay its debt as promised when the bond matures. Bonds are given credit ratings by agencies such as Moody’s and Standard & Poor’s. In general, the higher the rating, the lower the credit risk. Junk bonds, which are not investment grade securities generally have the lowest ratings, are among the riskiest in terms of credit. People who invest in them typically seek higher yields to compensate for their higher credit risk.
- International risk: International investments also involve additional risks, including the possibility of fluctuating currency values (currency risk) and the risk that political and economic upheavals may affect a country’s markets. […]
