A Review of Risk: It’s a Good Time to be a Federal Employee Sponsored by:Todd Carmack

What comes to mind when you hear the word “risk”? I’m certain you’ll most likely think about the risk of investment. That’s “market risk.”

This is the risk where the value of an investment may increase or decrease as market factors change. These factors have a significant impact on the performance of the financial market and affect all asset classes.

Market risk affects the whole economy and most of the industries and companies in it. For instance, a steep rise in the prices of crude oil will push up the cost of transportation, reduce disposable income for consumers, and put pressure on companies to increase salaries.

An example of market risk is the 2000 recession caused by the collapse of the dotcom bubble, the 9/11 attacks, and several accounting scandals in major U.S corporations. There’s also the Great Recession of 2008, which affected the United States and Western Europe. It was caused by a collapse of the housing bubble of the 2000s and led to a crisis that threw the financial market globally into a tailspin.

It’s important to note that market risk cannot be avoided by diversifying your investment. It affects all asset classes like stock, bond, real estate, ETFs, and even gold. 

Market risk is also called “systemic risk,” as it relates to factors like recession that can impact the whole market. 

Types of Market Risks

• Interest Rate Risk: This covers the volatility that may result from an interest rate fluctuation. This affects the returns on fixed-income investments. 
• Equity Price Risk. The risk that share prices may go up or down. It also covers fluctuation in prices of commodities like crude oil and gold. For instance, if you buy stock for $5 per unit and hopes to sell it at a higher price, there’s the risk that the prices might go down instead.
• Foreign Exchange Risk: Also known as currency risk, this arises because of the fluctuations in currency exchange rates. It can affect the value of the investments denominated in that currency.
• Commodity Price Risk: Refers to the possibility that the prices of commodities, such as gold, metal, and crude oil, can change value dramatically. Commodity price risk affects the government, producers, and exporters. 

Specific Risks

Besides systemic risk, you can also run into what’s known as non-systemic risk or specific risk. It’s called “specific” because it doesn’t affect the whole market or economy. Instead, it applies to a particular industry, company, or sector. 

For instance, a pharmaceutical company may have a product removed from the market, which may affect its shares.

Investors who put their money into any business will first analyze the specific hazards that are peculiar to that industry and the company.

Factors That Can Cause-Specific Risk

Two factors can cause-specific risk – business risk and financial risk.

• Business risk: These are internal or external factors that may lead to a decline. For instance, the resignation of a director may affect the company negatively (internal). The FDA banning a company’s product can also change its value (external).
• Financial risk: Also known as credit risk, this relates to the capital structure of the company. A weak capital structure can affect a business earning capacity and cash flow.

The good news is that unlike systemic risk, the effects of unsystematic or specific risk can be reduced by diversifying. Invest in multiple asset classes, so if the value of a particular asset falls, the other assets will ensure that your portfolio is balanced.

So far, we have been talking about how a market decline affects investments. We haven’t looked at the economic decline that accompanies these market downturns and how they affect people.

The impact is usually dire for individuals without secure employment and retirement funds. The specter of bankruptcy and unemployment can affect people who aren’t affected by the resulting loss in the value of investments.

So if you have a federal job, make out time and thank your lucky stars. You are better off than most people, not only in this country but globally. 

Contact Information:
Email: [email protected]
Phone: 6232511574

Bio:
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.

Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.