For many investors, risk is something you know when you see it. It shows up once the investment has already dropped ten percent or more. For others, it may be certain types of investments. But, risk can also be found in the safest investments.
While our economy is improving almost everywhere you look, there are still many hurdles in our future that will have to be navigated in some way. The obvious obstacle is the lingering high unemployment. We will not see consistent growth until this rate continues its decline and the unemployment rate is closer to the seven percent range. As such, parts of our economy may do better than others and thus the growth in every industry will not be the same.
Another hurdle is the cities and states’ budgets. Many local and state governments are struggling to meet balance budget requirements. In some cases, it will require significant tax increases, either through property taxes, sales taxes, or income taxes depending upon the location. These changes will impact the recovery as well as growth of industries when they are made. These changes could be so significant as to slow the current recovery. But, some of these governments may be forced to “kick the can down the road” and see if there are ways to delay inevitable tax increases.
Many retirees are still in search of investments paying higher income amounts. It is no longer safe to look only at the name of the issuer and the yield when determining whether the investment should be purchased. In the coming months and year, many state and local governments may see their credit ratings adjusted downward. When this happens, it will most likely impact the value of the bonds they have issued. To avoid investing in what is thought to be a “safe investment”, additional research to confirm ratings is necessary and should be confirmed at least annually to avoid surprises.
For many of my clients, I provide a list of some of the risks which exist when investing. When asked, most investors are familiar with business risk. When a business’ income goes down or becomes a loss, it is likely their stock value will drop. Some may call this market risk. Another common risk is inflation risk. Bonds are particularly subject to this risk since the original investment is promised to be returned at a future date. If that date is years away, due to inflation the investor will not be able to purchase the same amount of goods when the bond matures as they were able to purchase when the investment was made.
In addition to these two risks, there are also allocation risks, currency risks, interest rate risks, liquidity risks, political risks, timing risks, and withdrawal risks. Some of these may be obvious while others may be less clear. Interest rate risks will be impacting many investors in the coming years. As interest rates increase, the value of fixed income securities, like many bonds, will go down in value. The longer the bond’s maturity, the greater the impact. Thus, those investors purchasing five or ten year bonds today to achieve a higher yield will see their investment drop in value as the rates increase. Naturally, they can hold the bond until maturity and its value will recover, but if they must raise cash they may be forced to sell while the value is down.
Investors should remember, even safe investments have some risk, whether it is in plain sight or hidden, it is there.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.