Risk Management: Market, Interest Rate and Currency Risk
Currency Risk History has shown that successful investing requires discipline and patience. When emotions and investment risks run high, it can be easy to lose focus on your investment strategy. To help you overcome these challenges, here are some important items to keep in mind:
Do You Know the Risks?
Investors need to remember that markets can be turbulent and that preparing for potential declines is essential. There can be a strong temptation to pull out of markets when they become volatile. However, instead of acting on this temptation, it may be smarter to adjust your investment approach. By remaining flexible, you might be able to take advantage of opportunities while managing risks.
- Interest rate risk is the potential for investment losses resulting from a change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment will decline.
- Market risk is the risk that arises from movements in stock prices, interest rates, exchange rates, and commodity prices. Market risk is distinguished from credit risk, which is the risk of loss from the failure of a counter party to make a promised payment, and from a number of other risks that organizations face, such as breakdowns in their operational procedures. In essence, market risk is the risk arising from changes in the markets to which an organization has exposure.
- Currency risk is sometimes referred to as “exchange rate risk” and arises from the change in the price of one currency in relation to another. Investors or companies that have assets or business operations across national borders are exposed to currency risks that may create unpredictable profits and losses.
A variety of factors may cause one to act more cautiously than normal, including ongoing global uncertainties and fears about the overall economy. This can lead to investors flocking to low-risk investments despite misalignment with their goals. Remember, while minimizing risk can feel like a safe move, you could miss out on opportunities as a result, or...an even greater risk right now: the risk of not competing with inflation in the long run (today's dollar won't buy the same goods and services 20 years from now).
Another mistake can be creating a portfolio that doesn’t reflect your overall risk tolerance. When building a portfolio, the objective is to take on the amount of risk that aligns with your goals and time horizon. This is often accomplished through allocation of assets. It’s important to remember that asset allocation is an approach to help manage investment risk. It offers no guaranteed protection against investment loss.
Leave Emotion at the Door
When markets swing, emotional decision making can wreak havoc on the most carefully designed investment strategies.
Fear and greed can drive anyone’s financial decisions. Fear can cause us to abandon an investment strategy when we hyper focus on the most recent negative news of the day, while greed can cause us to chase investment fads and assume too much risk. As you invest, you can support your strategy by working to manage emotion-based decisions.1 Use the STOP acronym to help manage your thoughts and actions daily. This is a tool used in mindfulness that will prompt you to check in with how you are feeling, what you are thinking, and what behavior you’re engaging in, before you take actions you may later regret. You may stop throughout your day and notice you are engaging in a lot of negative self-judgments or that you are feeling tense or anxious, for example. Here are the steps you can work into your everyday (it just takes a few moments).
1. Stop. Whatever you’re doing, just pause for a moment.
2. Take a breath. Whatever you are doing or thinking about, taking a breath allows you to reconnect with the present moment and removes your brain from being on autopilot. It's an anchoring technique to help with feelings of anxiety. Relax your shoulders. Roll them back. Relax your jaw line. Inhale slowly and deeply through your nose, keeping your shoulders rolled back and relaxed. Allow your abdomen to expand, your chest should rise very little. Exhale through your mouth, pursing your lips and keeping your jaw relaxed. You can inhale, count to four, then exhale on a four count, as well. Repeat this breathing exercise for a few minutes, or as needed. Sometimes it's nice to do this while gazing down or closing your eyes, as well.
3. Observe. Notice what is happening. What are you feeling with in? What is happening on the outside? What may have prompted these thoughts or feelings? Take note of what is going on within you and around you before you take any actions. What is most concerning to you right now and what are some options on how you can best manage that? What are possible consequences of different courses of action?
4. Proceed. This is when you can either decide to take action, or not. The information you just gathered on your own, during a brief check in, may prompt you to change your course or to proceed. You may want to consult with an expert before proceeding. For example, if you have questions regarding your investment portfolio right now, or if you are going through a major life change that could have any financial implications, it could be time to reach out to a financial planner.
The more you STOP throughout your day, the more you re-engage with the present and disengage from habitual movement of your mind. A simple breathing exercise can help reduce feelings of anxiety that can come from shallow breathing throughout the day, so that you can make focused financial decisions that will be in your best interest in the long run.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.