Lately, what with the state of the world being such a heartbreaking mess these past few years, I have been considering how I would fare in an alien apocalypse. It seems only right to prepare for everything.
The movies suggest that everyone would fight, tooth and nail, to stay alive. That amidst alien invasion they would shed blood, sweat, and tears all to end the day hiding under a bridge scavenging for canned tuna.
This gives me pause.
These writers are out here trying to convince us that aliens are running about the earth blowing up the planet, and with no internet, no fresh pasta, no glass of merlot to pair with said pasta, no films, no overpriced Americano misto with oat milk on an autumn morning, your Spotify is probably down, the concept of a bath is a mere fever dream, and your skincare routine that you’ve worked on for years to perfect is undoubtedly out the window…we would all collectively keep on keeping on?
That our fellow man and innate human instinct to survive is enough? Not for me. Fran Lebowitz, (as always), put it best when she said:
All God’s children are not beautiful. Most of God’s children are, in fact, barely presentable.
All this to say that I am going down with the ship. I am DYING (written in shouty capitals for emphasis). I will throw myself into the throng of aliens the minute they touch down on this planet. I can barely get out of bed on a good day nonetheless amid an alien apocalypse?! No. This is my official statement (for anyone who’d care) in case it all goes down and people start wondering where I am; I’ve gone peacefully into the night.
This brings me to today’s topic. I realize I’ve never spoken about risk (aside from a running metaphor on market volatility mimicking the behavior of my little sister). As aforementioned, the risk of trying to survive an alien apocalypse is, evidently, far too high. In the case of an investment portfolio, it varies depending on what you have invested in…
8 Types of Investment Risks:
- Market Risk:
This is your tried-and-true classic risk when investing in the stock market. It is at the whim of economic shifts and worldwide events (ahem, pandemic), and therefore so are you. There are 3 main types of market risk:A) Equity risk: Your morning coffee. You’ve heard it all before. This type of risk applies to an investment in shares. The market price of shares varies depending on a cute little concept called supply and demand. Equity risk is the risk of loss due to a drop in the market price.B) Interest rate risk: Whatever is more boring than your morning coffee – brushing your teeth. This type of risk applies to debt investments such as bonds. Basically, it just refers to the risk of losing money due to a change in interest rates. If the interest rate goes up, the market value of bonds will drop. Whatever, I’m bored too.
C) Currency risk: Your long-distance fling with an Italian man. (These metaphors make no sense and have no consistency, just ignore it, I’m still thinking about the apocalypse). This type of risk applies when you own foreign investments. It is the risk of losing money due to movement in the exchange rate. For example, if the US dollar becomes less valuable relative to the Canadian dollar, your US stocks will be worth less in Canadian dollars.
- Liquidity Risk:
You spent $1000 on a designer, cashmere sweatsuit and now need a little extra for rent money. You’ve invested in stocks because you are a modern woman but need to take some of that investment money out immediately. Meet liquidity risk.This is where you are unable to sell your investment at a fair price and get your money out when you want to. To sell an investment, you may need to accept a lower price. - Longevity Risk:
Something you needn’t worry about because you read my articles and are financially literate enough to shock any conservative white man at a dinner party. But so you know, this refers to the risk of outliving your savings (relevant for those who are retired or nearing retirement). - Concentration Risk:
As it sounds. The risk of loss because your money is concentrated in 1 investment or type of investment. Personal finance courses teach Warren Buffett’s statement as gospel for a reason: “diversification is protection against ignorance”. Individual stocks can be considered tantamount to casino gambling. - Inflation Risk:
If at this point you don’t know what inflation is and you’ve been reading my articles from the outset, you can just exit stage left. This relationship is not working out.This refers to the risk of loss in your purchasing power because the value of your investments does not keep up with inflation. This is particularly relevant for the shove cash under the mattress people or those who own virtually risk-free debt investments like AAA bonds.Shares (stocks) typically offer protection against inflation because most companies can increase the price they charge customers (making it so share prices rise in line with inflation). Real estate, as Vancouverites will feel wholeheartedly, also offers protection from this risk because landlords increase rents over time.
- Credit risk:
I wrote about bonds here, but to distill it: when you buy a bond, you’re lending money to a company or government for a set period of time. It makes sense, then, that the risk of this type of investment would occur when the entity or company that issues the bond runs into financial difficulties and cannot pay the interest or repay the principal at maturity.You can evaluate credit risk by looking at the credit rating of the bond. For example, long-term Canadian government bonds have a credit rating of AAA indicating, as it sounds, the lowest possible credit risk.A fun little fact to make you an utter bore at your next dinner party: corporate bonds are always considered to have a higher credit risk than government bonds because when a government needs more money, they can simply raise taxes.
- Horizon risk:
You had big dreams that the new decade would bring prosperity and joy but instead you have lost your job, been stuck inside, and feel nothing is on the horizon? This will, unfortunately, affect your investments.If your investment horizon becomes suddenly shortened, you may be forced to sell certain investments that you were expecting to hold for the long term. If you are forced to sell investments at a time when the markets are down, you are likely to lose money. And just like that, we have circled back to section 2 (liquidity risk).
- Foreign investment risk:
This is wildly redundant. Refer to section 1C and you’ll get the main points.
Until next week. Enjoy all of God’s barely presentable children.