There are several types of investment risk, including:
Market risk: the possibility of an investment losing value due to changes in the overall market or economic conditions. For example, a decline in the stock market can negatively impact a portfolio that is heavily invested in stocks.
Credit risk: the risk of default or failure to repay a loan or debt security, leading to a potential loss of the invested capital. For example, if a company you have invested in through a bond defaults on its payments, you may lose some or all of the invested capital.
Interest rate risk: the risk that changes in interest rates will negatively impact the value of fixed-income securities such as bonds. For example, if interest rates rise, the value of existing bonds will decline.
Inflation risk: the risk that the purchasing power of your investment will decline over time due to inflation. For example, if inflation rises faster than the return on your investment, your purchasing power will decrease.
Liquidity risk: the risk that an investor may not be able to sell an investment quickly or at a fair price. For example, if you need to sell a less liquid asset such as real estate in a hurry, you may not be able to find a buyer at a fair price.
Currency risk: the risk that changes in exchange rates will negatively impact the value of foreign investments. For example, if you invest in a foreign company and the local currency declines in value relative to your home currency, the value of your investment may decrease.
Each type of investment risk can have a significant impact on a person's net worth, and it is important to consider these risks when building and managing a portfolio. A well-diversified portfolio can help mitigate some of these risks by spreading investments across different asset classes and geographies.
