(For more information on investment risk, see The Tools & Techniques of Investment Planning.)
Most people think of investment risk as the potential for loss. They envision the dollar value of their hard-earned assets shrinking due to forces beyond their control. Yet because people purchase investments with the expectation of gain, focusing on the potential for loss alone is insufficient in explaining investment risk.
The notion of investment risk must take into account the possibility that the return may be positive (but greater or less than expected), zero or negative. There can be wide variations in the magnitude of either positive or negative returns. Examining all possibilities helps you more accurately define investment risk as the variability in the expected return from an investment. The greater the potential variation in the investment’s expected return, the greater the actual risk of owning the investment.
The slideshow above identifies 10 key types of investment risk. It’s a good definition set to share with clients as they build and manage a portfolio.
For additional information on investment risk, see The Tools & Techniques of Investment Planning.