Investment Risk is the likelihood that an investment’s actual return will not meet that investment’s expected return. As defined below, the types of risk are Systemic and Un-systemic.
- Systemic – overall market; hedge to protect
- Natural Event
- Examples of systemic risks related to fixed-income securities include those related to interest rates and inflation.
- Un-systemic – stock-specific; diversify to protect
- Political – linked with emerging markets, where the political systems are immature
- Legislative/regulatory – linked with first-world countries, where the legislative actions are immature:-)
- Duration – Interest Rate risk for a given bond
- Opportunity Cost
In the illustrious words of Warren Buffett, "Predicting Rain Doesn’t Count. Building Arks Does." Buffett’s conservatism stems from his awareness that the future is profoundly uncertain. “In financial markets, almost anything that can happen does happen,” he warns.