| As we mentioned in previous articles we know | | | | 2. Interest rate risk |
| that our government only represents about 30% | | | | Investment always carries interest rate riska) All |
| of our retirement income. The company | | | | long-term bonds are sensitive to ups and downs |
| retirement pension plan offers another 30% and | | | | of the interest rate. When interest rates go up, |
| many of us do not have one. It is up to individuals | | | | long term bond prices suffer the most compared |
| to invest wisely short and long term in order to | | | | to short term bonds, and low rates do the |
| make up for the short fall if he or she would like | | | | opposite.b) It is for your own investment's sake |
| to live comfortably after retirement without giving | | | | by diversifying holdings and having debt securities |
| up some retirement plans. In this article, we will | | | | with a range of maturities.c) Common stocks are |
| discuss investment return and inflation. | | | | also influenced by high interest rates, because the |
| 1. Inflation risk | | | | high rates discourage business expansion. When |
| Inflation means too much money chasing too few | | | | the interest rate is down, businesses are likely to |
| goods, and this results in prices for goods and | | | | borrow for business expansion. |
| services going up. Inflation may also be expressed | | | | 3. Market risk |
| as too much money having been printed by the | | | | The supply and demand law governs the |
| central bank causing too much money compares | | | | marketing risk as follow:a) When demand |
| to the same goods produced. | | | | increases, supply decreases, thereby increasing |
| Sometimes with the economy's down turn and to | | | | the cost of the product.b) When demand falls, |
| avoid the country falling into recession, some | | | | supply increases at first and then it decreases. |
| governments may overreact with stimulated | | | | 4. Business risk |
| packages, causing too much money in the market | | | | Investors are attracted to companies with |
| resulting in inflation. Normally, in the inflation period, | | | | growing or stable earnings, and they usually pay a |
| interest rates to go up, all leading to a vicious | | | | higher price for investing in them, but under the |
| spiral. | | | | down turn of the economy, the risk of earnings |
| Inflation is measured by the annual percentage | | | | from the business decline, reducing not only your |
| (%) change in the Consumer Price Index (CPI). | | | | equity but also your return. It is for investor's |
| In this environment your investment's real return | | | | sake to defend against risks in your investment |
| must be higher than zero, otherwise you are | | | | portfolio by understanding current economic |
| losing money. Real return = rate of return of | | | | conditions, knowledge of investments, and |
| investment minus inflation rate. | | | | diversification. |