While some investments are certainly more "risky" than others, there are no risk-free investments. Thinking one can avoid risk by not investing at all can be the riskiest of strategies – no matter how old or young the investor may be. All investors want to minimize risk and maximize reward, and elderly clients can and should be reminded of the risk/reward concepts that may once have guided their financial decisions. Following is a brief review:
- Inflation Risk: Inflation diminishes purchasing power and investment returns. If a person's savings and investments can't keep up with the rate of inflation, moving into growth-oriented investments such as stocks, stock mutual funds, or variable or indexed annuities may be good alternatives.
- Interest Rate Risk: Fixed-income investments, such as bonds, are sensitive to interest rate changes. When interest rates rise, the value of these investments falls, and vice versa.
- Economic Risk: If our economy declines, earnings potential in companies and whole industries typically decreases as well. Some businesses can ride out dips in the economy without ill effect; others have a harder time adjusting.
- Market Risk: Market risk is exposure to the uncertain market values in the future. If an investor holds a portfolio made up of X, Y and Z, he or she knows its market value today, but is uncertain about its market value a week from now. This investor faces market risk, which affects almost all types of investments. Historically, the way to reduce market risk is through long-term investing.
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