DLC Financial Advising Services

2016 4th Edition (Other Editions)

INVESTMENT RISK FACTORS

Nearly anything you might do with your money involves risk. The key is to understand, limit and manage risk in such a way as to accomplish your objectives no matter what happens. There is no investment that does not have one or more elements of risk. Yet, some of those with significant risk, such as real estate, common stock and closely held businesses, have the greatest potential for return. The only solution is to diversify, spread your funds around, carefully balancing one risk against another.

INFLATION RISK

Will today's money buy as much in the future? The risk that it will not is inflation risk. Just look at the costs of the many items you use every day. Compare their costs today with the costs of ten, twenty or thirty years ago. The costs of housing, automobiles, utilities, food, clothing, theater tickets, all have increased substantially through the years. Inflation robs the value of a fixed investment, which stays level, such as savings account. The purchasing power of the principal sum can be gradually eroded.

MARKET FLUCTUATION RISK

This is the risk that the real estate, limited partnership interest, stock, bond, or investment company shares which you have purchased will go down in market value after you purchase them. The market in general may fall and then rise, but your specific investment could fall and then not rise!

SPECIFIC BUSINESS RISK

You can encounter this risk if you invest all or a major portion of your assets in a single business. Everything may sound perfect, but for some reason, the business fails. Perhaps the mine caved in, or the factory blew up, a key employee left or died, a major competitor appeared or a superior technology was discovered which made the whole company obsolete. Some well known businesses have done very well for years, or even decades, only to plummet in value due to a variety of circumstances.

THE RISK OF ILLIQUIDITY

This is a risk that you have invested your money in an asset that cannot be easily sold. During difficult economic conditions, a drastic price reduction may be required in order to sell your asset. Real estate and closely held businesses are notoriously illiquid. Events beyond your control or anticipation could cause an investment to become illiquid.

INTEREST RATE RISK

If you invest your funds in a long term instrument at a fixed return, such as a bank certificate of deposit, bond or long term bond fund, there is a risk that if the interest rates rise, the value of your investment will decline. The longer the maturity, the greater the risk.