Ask the Advisor – 11/6/2007
Despite it being a “big” election day here in Hoboken, the Hoboken411 Financial Advisor doesn’t stop doling out helpful and insightful money tips.
More about risks
Last week, we found out…
If a company releases less than perfect earnings, you will eventually (occasionally overnight) have less money in your pocket. Market risk.
If you procrastinate in investing and leave it sitting dormant, out there in black space essentially, not doing anything, you will eventually have less money because inflation will beat you. How sad: Inflation risk.
If you fail to take 1 minute and educate yourself on the relationship between the interest rate that banks lend at versus the interest rate that you get paid from bonds and preferred stocks, you will have less money: Interest rate risk.
This week, we’ll conclude by discussing… Industry and Company Risks.
Industry risk refers to the risk that you face when you invest in a particular sector of the economy. For example, if you invest primarily in one sector, you could do well if that industry outperforms most other industries, but your portfolio could be severely affected if that group falls out of favor with investors.
A good example of industry risk is what took place in the technology sector during and after the infamous “Bubble.” After experiencing strong growth throughout the last half of the 1990s, technology stocks fell sharply during the first three years of this decade, creating significant losses for investors who were heavily exposed to this sector.
One of the best ways to deal with industry risk is to invest your assets across several industries. By doing so, you can enjoy the key benefit of diversification — the positive performance of one industry group can help to offset the negative results of an under-performing sector.
Company risk refers to the concept that your assets may decline because a significant portion of your portfolio is invested in the stock of one company. This is a risk often faced by employees whose net worth is largely tied up in their employer’s company stock.
Diversification can be the key to limiting the risk of investing mainly in one company. Focusing on high-quality companies should be another part of this strategy. Generally, the stocks of high-quality, well-established companies (e.g. blue chips) tend to carry less risk than those of small, emerging growth companies.
As you can see, it doesn’t matter if you invest in the bling or pass on the rings, shop at Wal-Mart or you’re Alice Walton, the same principals apply to us all. A little time and education can go a long way (or nowhere!) if you know the risks and diversify them.
For more discussion and to schedule a consultation with The 411 Advisor:
Call (212) 643-5890 or (800) 223-4565