Higher prices lower the purchasing power of your investments. If your investment returns don’t exceed inflation you are losing purchasing power.
Economic recessions and depressions can have profound effects on asset valuations.
Let’s assume that many years ago you bought a Treasury Bond paying 8% that is maturing. Now the interest rate is less than 3%. If you reinvest it will have to be at a much lower rate.
If you need to sell an investment you may not be able to find a buyer in a timely manner. Most publicly traded equity and bonds are fairly liquid. But many alternative investments such as real estate, art work, coins, stamps, etc. may experience periods when they are illiquid.
Regulatory / Political Risk
Governments have a large effect on social stability and the economic environment for investment. Look for political stability and business friendly policies.
Mitigating and Minimizing Investment Risk
Once you understand the different types of investment risk you can mitigate and minimize risk with portfolio management tools. Here are some places on the AAAMP Blog to delve deeper into the solutions: Portfolio Management
This article was republished with permission from Arbor Investment Planner.