By investing for retirement you are helping to manage a critically important financial risk: the chance that you will outlive your money. But choosing to participate is just one step in your financial risk management strategy. You also need to manage risk within your account to help it stay on track. Following are steps to consider.
Familiarize yourself with the different types of risk
All investments, even the most conservative, come with varying types of risk. Understanding these risks will help you make educated choices in your retirement savings plan. Here are just a few you should be aware of;
Market risk: The risk that your investment could lose value due to falling prices caused by outside forces, such as economic factors or political and national events (e.g., elections or natural disasters). Stocks are typically most susceptible to market risk, although bonds and other investments can be affected as well.
Interest rate risk: The risk that an investment's value will fall due to rising interest rates. This type of risk is most associated with bonds, as bond prices typically fall when interest rates rise, and vice versa. But often stocks also react to changing interest rates.
Inflation risk: The chance that your investments will not keep pace with inflation, or the rising cost of living. Investing too conservatively may put your investment dollars at risk of losing their purchasing power.
Liquidity risk: This is the risk of not being able to quickly sell or cash-in your investment if you need access to the money.
Risks associated with international investing: Currency fluctuations, political upheavals, unstable economies, additional taxes--these are just some of the special risks associated with investing outside the United States.
Know your personal risk tolerance
How much risk are you willing to take to pursue your savings goals? Gauging your personal risk tolerance, your ability to endure losses in your account due to swings in the market, is an important step in your risk management strategy. Because all investments involve some level of risk, it's important to be aware of how much volatility you can comfortably withstand before you select investments.
If you'd like to discuss your risk tolerance please reach out to us at 972-745-7704.