What are investment risks?

When investing, risk is considered the amount of money you can potentially lose by investing in a specific asset class. The loss is, of course, realized only when selling the asset, but if asset prices take a long time to rebound, you incur a loss no matter what the portfolio theorists will tell you.

It is important to identify possible risks to your portfolio. The following issues are the main sources of risk to your portfolio:

• market risk: valuation of stocks measured by the price earnings ratio (P/E). When the economy takes a downturn earnings decrease, so stock prices come down to reflect a fair value of the earnings

• inflation risk: rising inflation is generally not good for either bonds or stocks. Bond yields rise and corporate earnings suffer

• currency risk: currencies have long term trends that influence the value of foreign assets. For example the dollar declined significantly during 2003-2008. This made foreign holdings for US investors more interesting, while non-US investors should have avoided USD holdings.

• systemic risk: market bubbles in general always contain systemic risk. At the end, the bubble always bursts. Specifically the banking crisis is a good example, where contagion caused the near collapse of the entire financial system.

• geopolitical risk: wars and regional conflicts can effect oil prices among others. For example, in the 1970's there was a global oil crisis after OPEC hiked prices through export restrictions.

These risks are fundamental risks, which you can evaluate by following the news or market commentary. If you combine fundamental issues with the technical analysis provided in the Free Investment Strategy, you will get a good picture of what is going on with your portfolio.