Investing comes with several risks that could impact the value of your portfolio. Here are the main types:
- Market Risk: The value of investments can fluctuate due to changes in the financial markets. This risk can be caused by economic downturns, political events, or shifts in investor sentiment.
- Inflation Risk: Inflation can erode the purchasing power of your returns. If your investments don’t outpace inflation, the value of your money decreases in real terms over time.
- Interest Rate Risk: Changes in interest rates can affect the value of certain investments, such as bonds. When interest rates rise, bond prices typically fall, and vice versa.
- Credit Risk: This applies to bonds or loans, where there is a risk that the issuer may default and fail to repay the principal or interest.
- Liquidity Risk: Some investments may be difficult to sell quickly without a significant drop in price. This risk is common with certain types of assets, like real estate or niche securities.
- Concentration Risk: Investing heavily in a single asset or sector can increase risk. Diversifying your investments across different asset classes and regions helps to mitigate this.
- Currency Risk: If you invest internationally, fluctuations in exchange rates could impact the value of your investments.
Understanding these risks is crucial, and it’s essential to align your investment strategy with your risk tolerance, time horizon, and financial goals. Consider seeking advice from a financial professional to create a balanced and diversified portfolio.
Find out more about saving and investing in Our Ultimate Guide to Investing
