Managing Risk in Investments
Sophisticated investors know that all investments carry with them some level of risk. An important element of investment management is recognizing various types of risks and controlling their impact on your overall portfolio. Four primary types of investment risk, and strategies for dealing with them, are outlined below.
This is the risk most people associate with investing. If you buy a stock or other security, it might gain or lose value, creating a gain or loss for you. Of course, the aim of investment management is to minimize this risk through the selection of diversified investments. Through a well-planned diversification strategy, you can ensure that no particular security's performance will jeopardize your overall portfolio performance. Diversification across several or many types of investment vehicles is an important investment management approach.
Individual investment vehicles have unique characteristics and qualities that affect their changes in value. In addition, categories of investments tend to gain and lose value concurrently. Stocks follow some general trends as a market, as do bonds and other securities. Once again, diversification is the best hedge against the risk of market fluctuations. Many markets behave somewhat independently of each other. For instance, bonds might hold value when stocks lose it. You need the advice of an experienced investment manager to establish the best diversification strategy for your individual situation-one that attempts to maximize your gains while minimizing your market fluctuation risk.
As your investments gain and lose value in their individual markets, the dollar gains and loses purchasing power. The rate of inflation can decrease the value of your portfolio. Your investment management strategy must weigh the risk of inflation against the risks of individual investments that may have rates of return higher than inflation.
The relationship between interest rates and the prices of fixed-rate securities, such as taxable and tax-free bonds, can expose your portfolio to risk. As interest rates fall, the prices of fixed-rate securities generally rise. Conversely, the prices of fixed-rate securities usually fall as interest rates rise. Your investment management strategy can balance this risk by adjusting the term of the fixed-rate securities you hold. Again, the advice of a qualified investment manager can help you optimize your portfolio's performance while protecting against the risk of rising interest rates.
The information provided here is obtained from sources deemed to be reliable, however, neither KeyCorp nor any subsidiaries guarantee the timeliness, sequence, accuracy or completeness of such information. Any discussion of investment or other financial products is not to be construed as to constitute an offer to sell or solicitation to buy such investment / financial product. A decision to buy or sell any investment or other financial product referenced should not be based solely on the inclusion of the investment / financial product in these articles. The information provided here is general in nature and should not be construed as specific or comprehensive advice, but is provided for informational purposes only. You should discuss the specifics concerning your business, financial, legal or tax matters with an appropriate independent, professional consultant or advisor before making any financial decisions. KeyCorp and certain subsidiaries, on their own behalf or as agents for their clients, any of their officers or employees may have a beneficial interest or position in any of the investment products mentioned, which may be contrary to any opinion or strategy expressed in these articles. Past performance of markets or investment products mentioned in these commentaries should not be considered to be indicative of future results.
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