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Dear Friends and Clients,
Halloween, my favorite holiday, arrives at the end of this month. Less hustle and bustle compared to Christmas. Also, much easier on the credit card. I especially love seeing the decorations that people put out. And it always warms my heart to see excited little princesses and monsters carousing the neighborhood in search of candy. It’s also fun for us homeowners. You never know what you’ll see when you open the door, all the while assuming the risk that you could end up being tricked. Tricks, treats … risks, rewards …
Investing is all about risks and rewards. Most investors focus their attention on rewards, same as the doorbell-ringing kids. And while I hope I don’t frighten anyone, here are a few investment-related risks worth keeping in mind:
Business Risks
- Management Risk – Is the company CEO a Warren Buffett or a Bernie Ebbers (former WorldCom CEO, currently enjoying 25 years of taxpayer-assisted room and board)?
- Credit (Default) Risk – Company goes broke, you lose most or all of your money. Blue chips are great until the croupier rakes them off the table. Remember Eastman Kodak?
Market Risks
- Socio-Political Risk - What happens to your healthcare stocks if Liz wins in 2020?
- Legal Risk - A mass-torts attorney petitions the court, claiming that your company’s baby powder causes cancer (see Johnson & Johnson).
- Country Risk – Argentina has an election surprise. Their main stock market has a pricing surprise … down 35% in one day.
- Currency Risk – Argentina has an election surprise. Their currency declines 25% in one day. Those Argentine bonds paying 6%? When those pesos are converted to dollars, your actual return is probably less than zero.
- Interest Rate Risk – Interest rates go up, bond prices go down.
- Reinvestment Risk – Interest rates decline, your income may decline. I once knew a man that rode 6-month CDs all the way down from 8% to 2%. Who enjoys seeing their income reduced by 75%?
- Duration Risk - The longer the maturity of a bond, the greater the price change when interest rates change.
- Inflation (Purchasing Power) Risk - Last year’s dollar buys 98 cents worth of stuff today, 96 cents worth next year, and so on.
- Liquidity Risk – Investors are fearful, trading locks up. You can’t sell your investment at a fair price … and maybe not for several days … or weeks.
- Market (Volatility) Risk - A good thing on the upside. Not good if you need to sell your investment and the price is waaaay down.
Happy October. Watch out for those goblins!
If you enjoy my monthly missives, please share them with a friend. If you don’t, please tell me. My office hours are typically 7:30 AM - 4:00 PM. Pick up the phone and let me know what’s on your mind. In the meantime, I greatly appreciate your trust and friendship, and thank you for the opportunity to be of service.
Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The above situation is a hypothetical example for illustration purpose only and does not represent an actual investment. Copyright © 2019