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We believe that it is very important for you to be fully informed as to all the potential things that could happen to you and your money when you invest in the financial markets and financial instruments of any kind. This document will, hopefully, cover all of the potential risks, conflicts, situations and events that could cause a devastating loss to your investment capital. If you do not understand that this can happen to you then you should not invest.
It is our belief that by being fully informed of all of the possible negative events that could occur, you can communicate better with us to construct an allocation that is best suited to your individual risk tolerance. Too often individuals take on more risk in their portfolios than they truly understand, so we provide this document to help you be better-informed during your decision-making process.
The analysis provided on RealInvestmentAdvice.com is on a best efforts basis. We can offer you no more than that. However, that is precisely what we will give to you – our very best effort to provide you the information necessary to help you achieve your financial goals and objectives. There is a possibility that we will fail in this endeavor – you should be aware of this. However, such failure will not be for the lack of our efforts. We may make mistakes; our investment strategy may not work as expected, or the markets as a whole may fail – but you will have the very best effort from us.
WHAT DO YOU MEAN BY RISKS?
This is nothing more than all the things that can cause losses of your investment capital.
The accepted regulatory statement is “Past performance may not be indicative of future results.” While this seems fairly obvious for most investors, it is probably the most overlooked and glossed over disclosure statement there is. Most individuals consistently enter into investments with the assumption that because it has done well in the past it will do so again in the future. However, the reality is that this is rarely the case.
Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by an advisor), or product made reference to directly or indirectly by any party will be profitable or equal to the corresponding indicated performance levels from the past.
Types of Risks
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an individual’s investment portfolio. No one should assume that any information presented serves as the receipt of, or a substitute for, personalized individual advice from a qualified advisor or any other investment professional. While most people know there is “risk” in investing – they do not often relate it to large losses of their principal that can happen.
The bottom line is “What you don’t know can hurt you.”
Understand the Various Risks Involved
Barron’s Finance and Investment Handbook defines risk as the “measurable possibility of losing or not gaining value.” The fear of losing money is probably one reason people may choose conservative investments, even for long-term savings. While investment risk does refer to the general risk of loss, it can be broken down into more specific classifications.
All investments contain some measure of risk.
Whether it is the high risks attendant to investing in small, unproven companies or the low risk of price fluctuations in investments issued by the U.S. Treasury. There are risk to them all.
Also known as systematic risk, market risk is the likelihood that the value of a security will move in tandem with its overall market. For example, if the stock market is experiencing a decline, the stock mutual funds in your portfolio may decline as well. This includes stocks, mutual funds, exchange traded funds, hedge funds or private equity investments.
In addition to the above fundamental factors, equity prices are affected by investors’ perceptions of how the company, the industry, and/or the U.S. and world economies will perform. In any short period, perceptions can vary materially from reality. As a result, stock prices of companies with excellent results and fundamentals can decrease materially for substantial periods of time, e.g., in a bear market. In short, investments are subject to the impressions of others. Some corporate investments that exhibit good long-term economic results may perform well over an extended period. However, a company with similar fundamentals may lose 100% of its value due to an economic downturn or some other catastrophic event that cannot be predicted.
Interest-Rate Risk. While this is most often associated with fixed-income investments, this is the risk that the price of a bond or the price of a bond fund will fall with rising interest rates. However, interest rate risk can also affect preferred stocks, real estate, credit markets, private notes, etc. If interest rates rise enough, it can also cause systemic market risk affecting equity investments as well.
Investment risk also involves the concept of duration. Fixed interest rate obligations vary in price as interest rates change during the period preceding maturity. Longer-term CDs are subject to the same risk. As interest rates rise, fixed income securities’ prices fall to provide the market rate of return. Conversely, falling interest rates may imply higher prices. While there are generally secondary markets for longer-term bonds and CDs, those markets can be illiquid and involve high spreads between the bid and ask prices, reflecting the infrequency of trading and the attendant risks to a market maker of finding a buyer at the appropriate price. Because of the infrequent transactions in fixed income securities, many of the valuations on your statements could be the last (“old”) trade price, costs or former estimates of values – not bid prices – and may not be reflective of what you might receive at the time of sale. Always consult your Advisor for a current bid or ask quote. Fundamental factors that might influence the issuer’s ability to pay also affect prices. If the debt instrument is subject to changes in interest rates by its terms, that can also negatively impact market price.
Credit Risk comes into play with bonds and bond funds. It refers to a bond issuer’s ability to repay its debt to the debt holder as promised when the bond matures. Bonds and bond funds are given credit ratings by such agencies as Moody’s and Standard & Poor’s. In general, the higher the rating, the lower the credit risk. “Junk bonds,” which have the lowest ratings, are among the riskiest in terms of credit. People who invest in them, therefore, typically seek higher yields to compensate for the higher credit risk. Other factors that can cause credit risks are severe economic shocks, inflationary pressures, interest rate increases and declining equity markets.
All but the most sophisticated and experienced investors should avoid purchasing significant amounts of fixed income securities that are unrated or rated below “BBB,” including high-yield mutual funds. Although yields are normally higher to reflect the increased risk, issuers may fail to pay interest or be unable to make required principal payments resulting in a loss of capital or a delay in the receipt of funds. You should limit purchases of such securities, if any, to a modest amount of your portfolio and consider them equity alternatives.
The risk that the value of your portfolio will be eroded by a decline in the purchasing power of your savings as a result of inflation is known as inflation risk. Inflation risk needs to be considered when evaluating conservative investments, such as bonds, bond funds, and money market funds as long-term investments. While your investment may post gains over time, it may be losing value if it does not at least keep pace with the rate of inflation. Inflation risks can also ultimately cause a rise in interest rates causing losses in fixed income investments as well as declines in equity prices.
Investment risk also relates to the type of security and its priority in the order of liquidation. Equity investments, i.e., common stocks, are most susceptible to the risk of total and complete loss if a company’s fortunes deteriorate.
While it is often appropriate for an investor to incorporate foreign securities in a portfolio, these investments can be volatile and are subject to many additional risk factors including currency fluctuations, possible political and economic instability, and different financial accounting standards. Foreign securities are best purchased in a professionally managed mutual fund or asset management portfolio to achieve broader diversification.
Market prices are a function of human emotions, as well as rationally determined supply and demand. Thus, even when the fundamental investment characteristics are sound, individual securities or general market prices can decline, often for protracted periods of time due to investors’ psychological fear or “panic selling”.
Risk is not just in investing. It is in every aspect of your life be it financial, personal or environmental. There are risks associated with the operation of any individual business, owning your own home, buying rental property, collecting trading cards or purchasing classic automobiles in hopes of selling them at a higher price in the future. It is possible that all of these investments could lose money over time.
Other risks may also transcend the individual company and relate to the health of the industry and the world economy. Furthermore, reasonable investment objectives can be frustrated by factors outside of anyone’s control such as war, acts of God, economic collapse and geopolitical upheavals. It is entirely feasible that an economic collapse of magnitude, random acts of God, and collapse of a country’s currency or a world war could cause investments on a global scale to go to zero. These are uncontrollable and potentially unforeseeable investment risks.
As you can see, there are many types of risks that need to be controlled. If the markets are subjected to rising interest rates and inflationary pressures – losses can and most likely will occur in equity related investments. Risk is almost never isolated to itself, so it is important to understand the many intertwined risks associated with investing money. There is a high degree of probability that you will lose some, if not all, of your investment capital at times.
While RealInvestmentAdvice.com will use it best efforts, tools and techniques to evaluate and communicate the risk / reward relationship and various investments, we do not have a prescient ability. Therefore, sometimes our investment strategies may not yield the expected results because of the complex nature of the risks described above.
However, our primary goal is the conservation of capital. This DOES NOT mean you will NOT lose money in an investment that you make or advice that your follow.
It is important to understand that you, the investor bears the risk of loss from unsuccessful investing. Any advice given on this website is for informational and education purposes only. RealInvestmentAdvice.com has no liability with respect to the use, or misuse, of any of the information provided herein. Investing your money is a very serious endeavor and fraught with much more risk than the media or press gives it. It is highly suggested that you seek out an investment professional to facilitate your investment needs.
LACK OF BEING PRESCIENT
RealInvestmentAdvice.com publishes information only on a best efforts basis. We are not prescient. We cannot, nor do we imply, that we can predict the future. Investing in the market is a speculation at best and the outcome of such investments cannot be guaranteed, calculated or implied with any degree of certainty. RealInvestmentAdvice.com wants to make sure that you fully understand that no such warranties or representations have been, or will be made, either now or in the future. The only thing we know for sure is that predicting the future is predictably uncertain.
We will promise that I will work very hard to provide you the most accurate information and direction possible. That is all we can do, no more, no less as we do not have a crystal ball. Therefore, it is very likely that sometimes you will lose money on some investments, not make as much as you would like at other times, and may do better than expected the rest of the time. But we cannot guarantee, imply or predict the future.
CONFLICTS OF INTEREST
A conflict of interest is when a person, entity or organization could possibly be influenced, due to financial remuneration, personal gain or some other benefit, to act in a manner that might be inequitable between the parties involved in a specific relationship.
RealInvestmentAdvice.com is a for-profit business. While we would love to be able to work for free, and provide advice simply out of the passion that we have for what we do, we all have bills to pay, families to support and children to send to school.
RealInvestmentAdvice.com may, from time to time, produce investment models for educational or informational purposes. Therefore, any performance illustrations used for illustrative or educational purposes are purely hypothetical in nature, but no implication should be made that you would have similar performance.
Performance analysis or comparisons could be based upon a model portfolio, a set of actual portfolios, or completely hypothetical in nature. Analysis of performance on a historical basis is typically used as an educational and informational tool so that you can make a better-informed decision about how your portfolio will most likely be handled by Real Investment Advice. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.
There should be no interpretation that there is any implied or explicit guarantee of some potential outcome relating to the performance or handling of such account and in no regard do we have the capability or foresight to provide any such guarantee.
OTHER POTENTIAL CONFLICTS OF INTEREST
It is also important for you to understand that the editors and managers of this website either are, or may be affiliated, with Real Investment Advice. This does provide a variety of other potential conflicts of interest. We are incented to provide you information in the hopes that you will become a client of Real Investment Advice. As a fee-only advisor, we are compensated on quarterly basis to manage investment portfolios for individual clients.
However, there is no guarantee, promise or implication that portfolios managed by Real Investment Advice will in any way adhere to any of the advice or investment models provided on RealInvestmentAdvice.com. The views and opinions contained on the website are those of the author only and in no way conform or agree with the opinions of Real Investment Advice.
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