Investment Risk Assessment

Every investor has a different level of risk that they are willing to accept in their portfolio.  Over time, this acceptable level of risk changes. It is important, therefore to conduct an assessment of your risk tolerance and the risk in your portfolio periodically.

Depending on the nature of the investment, the type of investment risk will vary so we have included some of the more common risks associated with investments below.

Capital Risk. A concern with any investment is that you may lose the money you invest - your capital. This risk is therefore often referred to as "capital risk."

Currency Risk. If the assets you invest in are held in another currency there is a risk that currency movements alone may affect the value. This is referred to as "currency risk."

Liquidity Risk. Many forms of investment may not be readily saleable on the open market (e.g. commercial property) or the market has a small capacity and may therefore take time to sell. Assets that are easily sold are termed liquid; therefore this type of risk is termed "liquidity risk."

Financial Risk. The risk that there may be a disruption in the internal financial affairs of the investment, thereby causing a loss of value, is called "financial risk."

Market Risk. Perhaps the most familiar, but often least understood form of investment risk is "market risk." In most markets the price of securities is set by the forces of supply and demand. If there is a high demand for a given issue of stock, or a given bond, the price will rise as each purchaser is willing to pay more for the security than the last one. The reverse of that occurs when the sellers want to rid themselves of an issue more than the buyers want to buy it. Each seller is willing to receive less than the last one and the market price, or valuation, declines.

Some forms of investment risk can be insured against. For example, the risk that an investment rental property might burn down, or the custodian of your stock and bond investments might go out of business. Most of the forms of risk that we concern ourselves with, financial risk, market risk, and even inflation risk, can at least partially be moderated by forms of diversification.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.

If you haven't reviewed you portfolio relative to your current risk tolerance lately, give us a call for a free risk assessment.