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I spend between an average of one to two hours driving daily to and from client appointments and every time I climb into my car I know I’m facing a variety of risk from the annoying (flat tire, ran out of gas) to the scary (there is smoke coming out of the engine) to the dangerous (accidents) and there isn’t a day that goes by that I don’t see at least one car stopped on the side of the road a victim of one of these risks.
I accept the risks of driving because I feel the rewards (get there faster and with air conditioning) are worth the risk relative to other forms of transportation such as walking, biking, public buses, etc. but that doesn’t mean I don’t take steps to try and reduce my risks such as not driving too fast and not seeing how low below E my fuel level can go.
Every mile I drive I am taking on risk just as every dollar I invest I am assuming some type of risk. Some investments may appear to be riskier (stocks) than others (cash) but there are no “risk-free” investments, there are just investments that you are comfortable enough with the risks to put your money in them.
- Company specific risks
- I try to reduce this risk by hopefully screening out weak investments before you invest and also limiting how much any one company makes up of your account
- Sector risks
- I feel this is the biggest potential risk to your portfolio.
- If one stock falls while others do okay, investors shrug it off as a problem company. When too many stocks start to fall, sentiment can quickly change from that was a problem company to that is a problem sector as they paint every investment in that sector with the same broad brush.
- I try to reduce this potential risk by limiting the percentage of any one sector to no more than 15% of your portfolio
- Inflation risks
- This is currently your biggest risk as so much of your portfolio is held in money market accounts that are not keeping pace with inflation.
- Relative return risk
- This is when your returns do not do as well as whatever is the hot sector of the time.
