Tags: Jaffe | investment | risk | rates

MarketWatch's Jaffe: 9 Investment Risks You Should Keep in Mind

By    |   Tuesday, 17 June 2014 08:40 AM

Anytime you invest, there's risk involved. And your risk is probably different than your neighbor's risk.

To be able to decide what to invest in, it's best to know what your greatest financial fear is. MarketWatch columnist Chuck Jaffe cites nine risks you should be aware of when investing.

1. Market risk. That's the risk that the entire market in which you invest tumbles.

Editor’s Note:
Retire 10 Years Earlier With These 4 Stocks


2. Inflation risk. That is the risk that you invest too conservatively and inflation destroys your returns. It is considered the "risk of avoiding risk," Jaffe notes.

3. Interest-rate risk. This is the risk that interest rates rise, meaning the value of your bond investments fall and you are receiving a below-average return.

4. Shortfall risk. That is the risk that you won't make as much money investing as you had planned. It's not really about the market. It's about the person investing too conservatively or too aggressively.

5. Special-situation risk. That's the risk that you'll have to devote money to a special situation, like a sickness to college tuition.

6. Timing risk. This is the risk that you won't be invested in a market when it registers its gains.

7. Liquidity risk. That's the risk that you won't be able to buy or sell an asset in a time of turmoil.

8. Political risk. That is the risk that government policy will adversely affect your investments.

9. Societal risk. This is the risk of a negative geopolitical event, such as a terrorist attack.

"Diversification, of course, involves taking on some or all of these risks, so that no concern comes up and ruins you," Jaffe explains.

"But that’s also why you can figure out where to invest 'now' by considering your biggest financial worry and playing to that particular type of risk."

Mohamed El-Erian, chief economic adviser to Allianz and former CEO of Pimco, says investors generally have grown complacent, failing to fully appreciate the risk present in financial markets.

Moderate economic growth and a "Federal Reserve that is transparent, measured and supportive of asset markets" have sparked the complacency, he writes in the Financial Times.

"Investors have taken these two factors as signaling a predictable and extended period of economic, financial and policy calm."

But that calm may easily be interrupted, El-Erian notes.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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Anytime you invest, there's risk involved. And your risk is probably different than your neighbor's risk.
Jaffe, investment, risk, rates
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2014-40-17
Tuesday, 17 June 2014 08:40 AM
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