Risk
(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)
Risk means exposure to danger and there are many types of risk in finance, not all of which are well known.
Market Risk: The entire market collapses along with your investments, like during Covid. You can't diversify this away, almost everything falls together.
Company-Specific Risk: Individual companies fail or lose market share. Diversification helps mitigate this.
Inflation Risk: Money loses purchasing power over time. If your savings account pays less than inflation, you're getting poorer in real terms.
Interest Rate Risk: Particularly affects bonds. As interest rates rise, existing bonds lose value because newer ones offer better returns.
Currency Risk: If you invest in foreign markets but the pound strengthens against that currency, you could lose money even if your investment performs well. Also affects returns on foreign property.
Liquidity Risk: Not being able to sell your investments quickly, or having to sell them at a reduced price when you need cash. Property has high liquidity risk; shares in large companies don't.
Concentration Risk: Having too much invested in one company, sector, or country. If that area performs badly, you're in trouble.
Understanding these risks and whether you can financially and emotionally withstand their effects is called your risk tolerance.
Love Eleanor. xxx
