History has shown that successful investing requires discipline and patience. When market volatility increases and uncertainty rises, it can be easy to lose sight of your long-term investment strategy. Understanding the different types of investment risk and how they can affect your portfolio is an important part of making informed financial decisions. Here are a few important considerations to keep in mind:
Do You Know the Risks?
Investors need to remember that markets can be turbulent and that preparing for potential declines is essential. There can be a strong temptation to pull out of markets when they become volatile. However, making investment decisions based on short-term market movements can have unintended consequences. Rather than reacting emotionally, investors should focus on maintaining an investment strategy that aligns with their financial goals, time horizon, and risk tolerance.
Here are three types of investment risk to understand:
- Interest rate risk is the potential for investment losses resulting from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment generally declines. The extent of the impact depends on factors such as a bond’s maturity and duration.
- Market risk is the possibility of losing money due to fluctuations in the financial markets. Changes in stock prices, interest rates, and commodity prices can all affect the value of investments. Market risk can impact an entire market or specific sectors and investments.
- Currency risk is sometimes referred to as “exchange rate risk” and arises from the change in the price of one currency in relation to another. Investors who hold foreign investments may experience gains or losses as exchange rates fluctuate, even when the underlying investment’s value remains unchanged in its local currency.
A Risky Balance
A variety of factors may cause one to act more cautiously than normal, including ongoing global uncertainties, geopolitical developments, and concerns about the overall economy. This can lead to investors flocking to low-risk investments despite misalignment with their goals. Remember, while minimizing risk can feel like the safest move, avoiding risk altogether can mean missing out on potential growth opportunities.
Another mistake can be creating a portfolio that doesn’t reflect your overall risk tolerance. When building a portfolio, the objective is to take on the appropriate amount of risk based on your financial goals and time horizon. This is often accomplished through a diversified allocation of assets that may help manage your portfolio’s risk.
It’s important to remember that asset allocation is a strategy for managing investment risk, not eliminating it. Diversification and asset allocation offer no guarantee against investment loss.
Leave Emotion at the Door
When markets swing, emotional decision-making can wreak havoc on the most carefully designed investment strategies.
Fear and greed can drive anyone’s financial decisions. Fear can cause investors to abandon an investment strategy when markets decline, while greed can lead them to chase investment fads and take on more risk than they intended. As you invest, recognizing and managing these emotions can help you stay focused on your long-term strategy.1
Your Patriot Advisor may be able to help when emotions enter the decision-making process. During periods of market volatility, they can answer questions, provide perspective, and help identify opportunities that may arise. Having a trusted professional to turn to can make it easier to remain disciplined and focused on your long-term financial goals. If you have questions about your portfolio or how current market conditions may affect your investment strategy, contact your Patriot advisor. We’re here to help you navigate the markets with confidence.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.