Understanding your portfolio risk exposure
Every type of market investment carries some kind of risk. Changes large and small – whether in the specifics of your portfolio or the overall state of the economy – drive market fluctuations can impact your investments.
While mutual funds have many advantages – from the power of pooled investment resources to professional portfolio management – they are subject to the same market and economic forces that all investments face.ᶲ
Or course, risk is part of life. Even if you didn’t invest at all, you’re facing an opportunity risk – the risk that you could have grown your wealth more by participating in the markets than sitting on the sidelines.
Here are five investment risks that can affect yourmutual fund portfolio.
1. Market risk
The risk that you will lose some or all of your principal. As markets fluctuate, there is always a possibility that the mutual funds you hold might be caught in a decline.
2. Inflation risk
The risk of losing purchasing power. If your mutual funds gain 5% in a year and the cost of living goes up by 2%, you are left with a real return of only 3%.
3. Interest rate risk
The risk that rising interest rates will cause your mutual funds to decline in value. When interest rates rise, bond prices decline and bond mutual funds may also decline as a result.
4. Currency risk
The risk that a decline in the exchange rate will reduce your gains (or add to losses). Even if the value of a foreign-currency-denominated fund goes up, a decline in the foreign currency can reduce your returns when they are exchanged back into Canadian dollars.
5. Credit risk
The risk that the issuer of a bond or other security won't have enough money to make its interest payments or to redeem the bonds for face value when they are due. Securities with a higher risk of default tend to pay higher returns.
Fortunately, not every type of mutual fund is susceptible to every kind of risk. Equity funds, for example, are subject to market risk but help protect against inflation risk.
Similarly, fixed-income funds are susceptible to interest-rate risk but offer some protection against market risk. By diversifying, you can reduce the impact of risk on your portfolio as a whole.
Reach out to a BlueShore Financial investment advisor today to review your portfolio and ensure your current investment risk is at the level that’s right for you.
