Putting Financial Risks into Perspective

It seems that changes in the financial markets happen more often, and that market swings are larger than they were a few years ago. Risk is the term often associated with changes in values of stock prices and interest rates. But, there are also other types of risk. Understanding various risks can help you determine the saving and investment strategies that are right for you.

Three types of risk

Risk of loss. When you buy something and sell it at a lower value you have incurred a loss.
Fluctuation risk. Change in the values of investments while held is also a risk. Handling daily changes in stock and bond values can be stressful.
Inflation risk. The rate of inflation, which hit double digits in 1979 and 1980, has declined since then and has recently been about 3%. While not large, at a 3% inflation rate an item that cost $100 in 2006 will cost almost $116 in 2011 and $134 in 2016.

Dealing with risk

Use common sense. "When something appears too good to be true, it probably is." Others have opinions of how you should handle your finances. But, you will live with the consequences. Don't believe everything you hear and read. Find a qualified financial advisor you can trust.
Diversification. "Don't put all your eggs in one basket." Spreading your assets into the appropriate categories of equity, fixed income and cash investments can reduce your overall risk and provide a logical guide based on your time-horizons and risk tolerance.
Long-term perspective. "Most people don't plan to fail, they fail to plan." Establish your objectives and follow a strategy to reach them.

As you map your overall financial strategy, make sure the combination of risks in your business, your job and your personal finances are appropriately balanced with the potential for overall return.

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