It’s a different story when it comes to retirement plan investing. Manyemployees have little experience with investing and, when the first start participating in their plan, they often lack the experience they need to determine and evaluate the risks involved with their investment strategies.

The following broad overview may help you understand the different types of investment risk that can threaten your portfolio. By learning how toreduce these risks through diversification and other strategies, you can make the most of your retirement plan investments.

Market Risk – This is the risk that stock and bond prices might fall due to economic changes within the U.S. and throughout the world. Domesticand global political climates as well as investor expectations can also affect the prices of securities.

Interest Rate Risk – When interest rates rise, bonds and bond funds lose value. Likewise, bond prices increase when interest rates fall. Thisoccurs because a rise in interest rates means bonds that pay a lower rate of interest are less desirable than similar bonds paying the higher rate.

Stocks and stock funds are also affected by interest rate risk. As interestrates fall, stock prices may also be affected and stocks and bonds may offer similar returns. In this environment, investors may prefer morestable bonds to higher risk stocks.

Financial Risk – Financial risk occurs when, for example, a bond issuer gets into financial trouble and finds it hard to make interest and principal payments to bondholders. It can also occur when reports of lower earningsper share cause the price of a company’s stock to drop.

Inflation Risk – Inflation risk relates to the decline in the buying power of a dollar over time. When prices of goods and services rise,purchasing power falls. Cash investments that earn lower rate of returnare generally most affected by inflation, while stocks are typically less affected because of their potential to appreciate in price at a faster rate than the inflation rate.

Currency Risk – If you own an international mutual fund, your return can increase or decrease because of changes in currency exchange rates.

For example, when the dollar rises in value in relation to the German mark, the return on the fund with investments in the stocks of German companies is reduced when the marks are converted to U.S. dollars.Recognizing and understanding different types of risk can help you choose investments that make the most sense for your financial goals.

(Alan S. Moore is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.)

Back to Top

Back to Business Headlines

Copyright © 1999, Wick Communications, Inc.

Best viewed with 4.0 or higher