ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

No Way to Escape Risk

Updated on March 13, 2015

Liquidity, Growth, and a Principal Guarantee

In the current low interest rate environment, investors are looking for ways to generate a return on their investment, without taking on too much risk. As a banker I would hear people tell me all the time that they didn't want to put their money in anything that had any type of risk. I would have to explain that in life there is no such thing as risk free.

Every investment carries some kind of risk.

When you are choosing where to invest, you have to keep in mind that there are 3 things that an investment can offer: growth, liquidity, or a principal guarantee.

You can only choose 2. Think of it like this, a savings account at your bank can give you a principal guarantee and the funds are liquid; you can walk down to the bank and pull out your money at any time. A mutual fund is pretty liquid and for the most part you'll probably see growth but there is no guarantee that the $10,000 you put in on Monday will be worth $10,000 on Friday.

Think about what sorts of investments you are choosing and what sorts of risk you feel comfortable with. Are you someone that panics if your investment is worth less on Friday than it was worth on Monday? If so you probably need to avoid putting too much of your money in a mutual fund. Do you get anxious when you see your money market is earning you $0.11 a year? Maybe you need to look at something with more growth potential just keep in mind that with each investment vehicle you are sacrificing at least one other potential benefit. Moving the money in your money market into real estate might mean that you have a much greater potential for growth but if something unexpected comes up, say the car breaks down and you need a quick $2,000, you probably won't be able to sell a strip of your lawn to pay for it.

Recognizing the types of risks is the first step in smart investing.

Growth, Liquidity, or Principal Guarantee?

What is most important to you when looking at a potential investment?

See results

Types of Risk

Interest Rate Risk - This is the risk that a fixed-rate instrument will decline in value as a result of a rise in interest rates. This a risk you face if you are purchasing a bond or a preferred stock.

Credit Risk - This is the risk that the issuer of a bond will not be able to pay. Typically you'll see a difference in the bond's rating due to this risk. The higher the rate on a bond the more likely it is to default.

Inflation Risk - This is the risk that the value of an asset or income will be eroded as inflation shrinks the value. To understand inflation I always think of the McDonald's Big Mac. When I was younger a Big Mac only cost one dollar but now a Big Mac costs $4.80. My $5 used to buy me 5 Big Macs, but now my $5 only buys me 1 Big Mac. My $5 dollars is worth less now than my $5 when I was younger.

Liquidity Risk - This is the risk that you might not be able to sell an investment when you want to. Say you own a fancy antique that you've been told is worth a million dollars. Well you decide 'you know I could really use a million dollars' so you decide to sell only suddenly there isn't a buyer for your antique. You could still say the asset is worth a million dollars but if there isn't a buyer for what you are selling its not like you can rip off a chunk of the antique for a quick 10 grand.

Market Risk - This is the type of risk that everything in the market will be affected. Think of the crash of 2008. Even companies that had nothing to do with real estate were affected and saw their market value slip.

Political Risk - This is the type of risk associated with social changes or unfavorable government action. Say you have money invested in a cigarette company and Congress passes a law outlawing nicotine, the value of your investment would plummet.

Currency Risk - This is the risk that comes from the fluctuations in the currency market. Each day the value of a dollar in comparison to a Euro or a Yuan changes. If you are investing internationally this is an important risk to keep in mind. If the dollar is strong your foreign investments value will fall. Think of it like this, if you want to get $100 American out of your foreign investment and the dollar is strong, then you'd have to sell more of your foreign investment than if the dollar was weak.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)