Whether you are an independent investor or are overseeing the investment portfolio of a company, risk will always be a factor that you will be faced with.
According to its definition, risk involves the chance of an investment’s actual return will differ from its expected return. In other words, risk includes the possibility of losing some — or even all — of the original investment.
It is important to note that investment risks come in many shapes and sizes, with some of the most common being as follows:
Inflationary risk: Also known as purchasing power risk, inflationary risk is the chance that inflation will undermine the performance of one’s investments. Ultimately, this form of risk has a direct impact on one’s real return.
Market risk: Also known as systematic risk, market risk is inherent to the entire system, as its severity is entirely dependent on the natural fluctuations of the market itself. The factors that impact market risk cannot be mitigated nor predicted.
Political risk: Another somewhat unpredictable trend, political risk is defined as the risk an investment’s returns could be thwarted as a result of political changes and instability, as well as the possibility of nationalization.
Although it seems as though these risks are inevitable and impossible to combat, there is a rather successful method of not only protecting one’s current investments, but one’s livelihood as well.
Similar to how one would insure their home or car in the event of a disaster or accident, one can self-insure their investments as well. This is known as transferring risk, or employing risk management strategies.
Transferring risk occurs when an investor purchases low-risk investment vehicles — such as indexed annuities or indexed life insurance policies — to ensure they are able to remain in the market while protecting a percentage of their portfolio in case a market correction or downturn arises.
This is often the wisest course of action, as it places the risk of a market downturn on a third party that is both trusted and well-equipped to do so. By placing your assets in their care, accountability will be lifted from your shoulders and you will be more resistant to losing a sizable amount of your investments and retirement funds.
If this method sounds as though it would be beneficial to you and your financial future — as it should — it is recommended that you speak to your financial advisor as soon as possible. After all, the sooner you are insured against an economic disaster, the better.