Identifying Risk
This information is provided for general informational purposes only and should not be relied upon as legal interpretations by the Office, shall not supersede any part of the Florida Statutes or Florida Administrative Code, and does not constitute legal or financial advice. The Office does not endorse any third-party or guarantee the accuracy of any third-party information linked to or referenced herein.
No investment product is 100 percent guaranteed; there is always some degree of risk. Before making an investment decision, investors should do their research, understand their risk tolerance, and know their financial goals to make a fully informed decision.
Systematic Risk
Systematic risk is in the market and outside investor control. Every investment product is generally susceptible to systemic risk. Systematic risk may include:
- Market risk – the risk that an investment will decline due to market fluctuations, supply and demand, or market conditions.
- Political risk – the risk that an investment will decline due to changes in government administration or international affairs.
- Interest risk – the risk of bond prices declining with increasing interest rates.
- Inflation risk – the risk that rising inflation will erode the return on an investment.
- Regulatory risk – the risk that newly enacted regulations will adversely affect the market.
- Currency risk – the risk that a change in currency exchange rates will affect an investment's value.
Non-Systematic Risk
Non-systematic risk is in a specific industry or business and can be avoided by investment strategies like diversification. Non-systematic risk can include:
- Business risk – the risk that a corporation will not achieve its stated goals or expectations.
- Business model risk – the risk that a corporation's product or service will not be manufactured, distributed, marketed, or sold at a profit.
- Expansion risk – the risk that a corporation will not be able to expand due to limited suppliers, employees, or customers.
- Officer risk – the risk that one of the managing officers or founders will leave the company or not act in the investor's best interest.
- Credit risk – the risk that principal and interest payments will not be paid on time or at all.
- Liquidity risk – the risk that a security will not be able to be resold or easily traded.
- Timing risk – the risk of buying or selling a security at the wrong time.
Risk Tolerance
The amount of risk an investor can tolerate is unique to each investor and their personal and financial circumstances and goals. Keep in mind that younger investors, or those with long-term goals, generally have a longer time to recoup any potential investment losses. In contrast, older investors, or those with short-term goals, have a shorter time to navigate market volatility. The amount that you invest compared to the amount of your income can also impact your risk tolerance.
Mitigating Risk
Investors can employ various investing strategies to mitigate risk exposure, including:
- Diversification – a strategy of investing across different classes, limiting risk exposure by offsetting any losses in one type of investment with the potential for gains in another type of investment.
- Portfolio rebalancing – adjusting an investor's portfolio over time to maintain the same initial risk exposure and ensure the same balance of debt and equity assets as originally decided.
- Target-date adjusting – reducing risk exposure by adjusting the investment portfolio as the time for utilizing the invested funds and any returns draws near.