Monday, September 26, 2011
Some fund managers may try to hedge their portfolios against adverse currency moves with currency futures or forward contracts. However, hedgers are fallible and lose money when the currency goes opposite their predictions.
In addition, a hedge costs money. Currency risk is generally not too much of a problem for long-term investors in well-diversified international funds.
4. Asset-Class Risk:
Stocks, bonds, and cash are the three major asset classes. If you allocate a disproportionate amount to any of the three main categories, or totally ignore one or two of them, you are subject to asset-class risk.
It's prudent to diversify across all three major asset classes even though you want to give primary emphasis to, say, stocks.
5. Management Risk:
The majority of actively managed funds underperform the broad market benchmarks. Even though a fund has beaten the market in the past, there are no guarantees it will continue to do so.
Individuals who stick with poorly run funds risk substantial under performance, which can compound over time. Investors in index mutual funds avoid management risk.
6. Sector Risk:
Industry or sector risk faces those who invest in narrowly focused sector portfolios, such as those focusing on health care or even utility stocks.
It also affects individuals holding more diversified funds that make big sector bets.
7. Country Risk:
This danger, which includes economic and political instability, is associated with single-country investments, especially those targeting developing markets.
8. Credit Risk:
The risk of default can be a concern for high-yield bond fund investors. Junk bonds can experience staggering losses when setbacks occur in this sector.
9. Tax-Rate Risk:
Investors have to be cautious in changes in tax laws that could make their holdings less valuable.
Understanding Different Type of Investing Risks