How Much Risk Is Too Much Risk?

Posted on May 20th, 2008 by vLogged

Protecting your assets is the top concern of everyone. Everyone has their own definition of this wretched word – ‘Risk’. Bottom line is that everyone is afraid of losing their money when it comes down to investment assets. The truth is that this definition takes a whole new meaning depending upon your current stage in life. For those in retirement, even a small risk is too much risk. On the other hand those in their initial states of career are more willing to experiment. Whatever be the case, understanding the different types of risks is the key factor over here. Its only then that one can personalize their definition of risk.

1. Market Risk – defined as “The risk that the value of your investment will decrease due to movements in the stock market”. The index movement is difficult to understand as its increase/decrease can depend upon anything from a company scandal to natural disasters to even terrorism. The key is to take advantage of the returns the market can offer without the inherent risk.

2. Interest Rate Risk – is the risk of fluctuating Interest Rates. Even though a Fixed Interest Rate is safer, it also means lower rates. One has to carefully balance between the two depending upon their circumstances.

3. Inflation – Even though this doesn’t directly affect your absolute savings, but it affects the cost of living index. Thus the effective money index goes down.

4. Excessive Taxation – Some simple steps like avoiding tax on re-invested income can help prevent one from this risk. However, more often than not, a poorly designed investment portfolio suffers from this risk. This is where one should get professional help.

5. Other Miscellaneous Risks – These are the risks which most financial planners fail to address. These involve huge medical expenses, lawsuits etc. This also includes the risk that one takes by not seeking professional help to combat potential risks that one’s portfolio may face.

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