What Are the Risks?
When investing in mutual funds and managed accounts, the main risk you face is the uncertainty of future rates of return, which can result in the erosion of your investment. Here's a breakdown of risks, which can be experienced in any combination:
The risk that movement in the financial markets will adversely affect your investment. You can always be assured of one thing when investing—the markets will fluctuate based on many factors, such as the state of the economy, current events, corporate earnings, interest rate movements, and sometimes even a statement from a high-ranking federal official.
Interest Rate Risk
The risk that the value of a fixed-income investment will drop as interest rates rise. Bond prices are inversely related to interest rates, that is, if one goes up, the other goes down. If you're heavily invested in bonds, the value of your portfolio may be greatly influenced by interest rate fluctuations.
The risk that the return on your investments will not keep pace with rising consumer prices. Historically, fixed-rate securities have sometimes not returned enough to protect investors against inflation, while, over the long term, equity securities have tended to keep up with or exceed it.
The risk that a company issuing a security may not be financially healthy due to any number of factors, like poor management, low product demand, or exorbitant operating expenses. Such situations can result in a plunge in the security's value, as well as a dividend reduction or elimination.
The risk that a bond issuer will not be able to repay its debt at maturity. Bond ratings by agencies like Moody's and Standard & Poor's identify the quality and risk level of bonds. Highly-rated bonds tend to carry the lowest risk, while bonds with low ratings, like high-yielding junk bonds, are typically the riskiest.
The risk that fluctuations in the exchange rate between the U.S. dollar and a foreign currency may decrease the value of a security that is either invested in or whose value is derived upon that currency. Global and international investments are most subject to this type of risk.
The risk that political and/or governmental actions or events may unfavorably influence the value of a security.
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The risk that underlying securities cannot be sold at a fair price within a reasonable period of time. Shares in large blue-chip stocks are considered liquid because there are a large number of outstanding shares that are actively traded. As a result, their stock prices are not dramatically affected by day-to-day buying and selling. Conversely, small-company stocks with less outstanding shares are generally not considered liquid, since a few big buy or sell orders can greatly influence the share price.