Concept of Risk

Trade-off decisions

Most of us know risk as volatility, or the extent to which the market value of securities fluctuate. In a portfolio, much of the volatility comes from market movement, in which we voluntarily participate. But investment risk takes several less obvious forms, too. They can be just as important in reaching your financial goals.

• Currency risk: arising from the change in price of one currency relative to another.
• Financial risk: the dollar or percentage decline an investor can accept, given their need for capital preservation, income and overall level of wealth.
• Inflation risk: the chance that investment returns won't keep pace with inflation over time, and consequently erode the investor's purchasing power.
• Liquidity risk: possible losses arising from situations in which there is not enough cash to meet investors' immediate needs.
• Longevity risk: that an investor outlives their money.

Portfolio evaluation invariably involves trade-off decisions. A suitable portfolio is one that best fits a client's present and future needs given their current financial circumstances.