Financial Forum

This series, Financial Forum, is presented by Pro Advantage Services, Inc., a subsidiary of Pharmacists Mutual Insurance Company, and your State Pharmacy Association through Pharmacy Marketing Group, Inc., a company dedicated to providing quality products and services to the pharmacy community.

COMING TO TERMS WITH INVESTMENT RISK

Ask two investors how they feel about risk and you’ll probably get two different answers. However, they are likely to agree that risk inevitably comes into play, both in selecting and in reassessing their portfolios.

Defining Risk
Risk is the unknown, the uncertainty tied to any investment decision. Since none of us can know the future, risk is always a factor in the decision-making process.

Risk comes in various forms:

• Market risk is the likelihood that the value of an investment will change because of fluctuations in the financial markets.
  Interest-rate risk results from the fact that interest rates change, affecting the value of an investment.
• Inflation risk is the possible erosion of your purchasing power. An investment must yield a rate of return that exceeds the current rate of inflation to increase purchasing power.
  
• Economic risk concerns the strength or weakness of economic growth and its impact on investment return.
• Political risk is the possibility that domestic or global political events may affect the stability of return on an investment.
• Illiquidity risk is the possible absence of a buyer (or market) in the event that you are forced to sell. This typically affects real estate and collectibles.

Risk and Reward
It is crucial to develop an investment mix that is suited to the level of risk you are willing to assume. The point where you stand on the risk/reward spectrum depends on variables like age, family situation, current and expected future income, tax bracket, and overall net worth.

Bringing It All Together
Investment objectives are best met by a blend of assets that match your risk tolerance, specific lifestyle, and long-term needs. Your financial advisor can help you establish your investment goals and assist you in continually appraising risk as well as performance, to build and maintain a well-balanced portfolio.