Anyone who’s ever taken a hot minute to observe the market or talk shop about the economy must realize any action that falls under the umbrella of investing comes with risk. The level of risk varies, however, depending on numerous factors, including the asset itself.
At our firm, we tend to focus on ways to help clients limit those risks. If you have any questions about your current risk factors, give us a call and we’d be happy to look at your current portfolio. We recommend you work with a financial advisor for insights into your particular situation. We can then assess those risk factors and recommend a variety of investment and insurance products that can help you work toward your short- and long-term financial goals.
For one example of a risk that is particular to an asset, let’s turn to bonds. We generally consider a bond investment less risky than a stock investment. But that’s mainly in consideration of market risk -- which can dramatically impact stock prices. However, bonds are more impacted by interest rates, so in an environment of changing rates, they are exposed to a certain level of risk as well. That’s why trying to look at assets side by side is not as simple as an apples-to-apples comparison.
For investors who are looking to buy individual stocks based on companies, the garden-variety wisdom is to invest in a company you understand well. This wisdom is based on the risk of the unknown. If you don’t know the first thing about a company, how confident can you be in its performance? Not only do you want to review the company’s financial performance, track record, business costs, leadership, risk factors, dividend history and corporate governance, it’s not a bad idea to have some first-hand experience or exposure to that company’s product or service.1
While traditional asset allocation emphasizes diversification across asset classes (think, mixing stocks, bonds, cash, insurance, etc.), it’s also worth considering diversification within asset classes themselves, to work against underlying risk factors -- for example, consider buying stocks from multiple companies, or different kinds of bonds. Risks run the gamut, from market risk and interest rate risk to currency and credit risk. Then, too, those risk factors may be more or less significant when applied to international companies, markets and even globalization trends.
In the past, one way American investors have diversified their portfolios is by investing in overseas companies. The recent trend toward “America First” has changed some of that sentiment, with more domestic money flooding into the U.S. markets. However, our long-term upward trend in performance leaves less room for growth, so it may be worth considering securities abroad again. If not, an investor runs the risk of being too domestically concentrated, which can yield two risky paths.
- Growth stagnates at the top of the market, and potential gains abroad are left on the table.
- If U.S. markets experience a setback, a heavy concentration can wreak considerable damage.2
One rising risk factor to consider: The threat of a sexual harassment scandal. From the flurry of recent allegations, it would appear some companies operate within a culture of inappropriate behavior. That puts those companies at higher risk for a scandal, which can impact its stock price and, subsequently, shareholder portfolios. For instance, as allegations about Harvey Weinstein’s misdeeds continue to surface, Weinstein & Co.’s financial standing has been hit hard. Just one more thing to consider when assessing investment risk factors.3
As different risks become more or less significant with the changing economy, just remember you don’t have to go it alone; call our firm for a consultation to see how your assets are positioned to cope with risk.
1Saikat Neogi. Financial Express. Nov. 29, 2017. “Stock market investment tips: 3 big risk factors to beware of to ensure you don’t lose money.” Accessed Jan. 29, 2018. 2PIMCO. March 13, 2017. “Risk Factor Diversification.” Accessed Jan. 29, 2018. 3Nasdaq. Nov. 6, 2017. “Sexual Harassment is a Major New Investment Risk.”
