When it comes to money, most women I know don’t like risk. I can’t tell you how many times women have told me they don’t want to lose all of their money, so they’re going to keep it under the mattress. Unfortunately, that is probably one of the most likely places to lose your money! There could be a fire, flood, thief, sketchy girlfriend, hungry dog—and there is no documentation that the money ever existed.
Risk is not just the chance of losing money—it’s also the measure of the unpredictability of the return. By taking on some investment risk, you seek a greater reward in the form of growth, dividends or interest.
In the world outside the mattress, you’ll find several types of financial risk. Here are a few that you might encounter:
Credit risk, or default risk, is associated with the likelihood of a borrower not making payments as promised. You’ll find credit risk in bonds and other debt instruments. These are graded by independent rating agencies, such as Standard and Poor’s. Debt instruments with very low default risk have a credit rating of triple-A. They are sometimes referred to as “investment grade” debt securities. Debt issuers carrying greater credit risk can be rated many notches lower, well into the “speculative grade” or “junk” category. As you might expect, investors who buy debt with lower ratings hope to be compensated for the greater risk with higher interest.
Business risk is the risk that a company in which you buy stock will fluctuate in value. Several factors can produce business risk, such as poor product innovation, management quality issues, adverse economic trends, lawsuits and loss of patents. A celebrity endorses a new product and the stock may go up. The company’s CEO is arrested for DWI and the stock may go down. Newer, smaller companies usually have less cash on hand, so they’re considered a riskier investment.
Market risk is the everyday risk of volatility in the stock market, i.e., that stock prices in general (not related to a particular company or industry) could be subject to wide swings up or down.
Interest rate risk is the risk that interest rates will go up or down, possibly rendering existing investments with a fixed return less attractive. Think about holding a 5-year CD at 1% and seeing interest rates go up to 3%. Bummer.
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