John Grobe, Federal Career Experts
What do you think of when you hear the word “risk”? What is most likely to come to mind is what is called “market risk.” This refers to the possibility that an investor might experience losses due to the overall performance of the financial markets in which they participate. Examples of market risk are the 2000-2003 recession, the “Great Recession” of 2008 and the recent drop in financial markets due to the coronavirus scare/pandemic. If you’re caught in such a market driven drop in value, you can run, but you can’t hide.
Market risk is sometimes referred to as “systematic” risk because it affects entire financial systems and cannot be protected against by means such as diversifying your holdings. It can affect the stock, bond, and other markets equally.
Types of market risk are:
– Equity risk, which affects the broad stock market. Think C, S and I Funds.
– Interest rate risk, which affects the rate of return of fixed income investments. Think F and G Funds.
– Currency risk, which affects the value of investments that are denominated in currencies other than the U. S. dollar. Think I (and to a lesser extent) C Funds
– Commodity risk, which affects the value of commodities such as crude oil, soybeans, etc. This could affect any of the three equity funds within the TSP.
You can also run into “specific risk”, which is also called “non-systematic” risk because it does not affect the entire universe of markets. Specific risk can be hedged against to some extent by diversification.
Types of specific risk are:
– Sector risk, which will affect only a certain segment of the economy. During the “Great Recession” the financial sector was hit even harder than other parts of the economy. Sectors like petroleum and related products, travel and leisure, and restaurants might find themselves harder hit in the current downturn.
– Credit risk, or risk of default, which affects individual companies. The Enron debacle is a good example of credit risk, as is the dramatic loss of value of the stock of the company formerly known as Lucent Technologies.
Thus far we have discussed risks that affect investments, but we haven’t yet looked at the economic destruction that sometimes (though not always) accompanies downturns in markets.
For those who are not as fortunate as we federal employees/retirees are (e.g., do not have secure employment; do not have money to invest for retirement, etc.) the situation can be for more dire. The specters of unemployment, bankruptcy and foreclosure can affect many people who are not affected by the loss of value in their investments.
Let’s take a moment and thank our lucky stars for our good fortune. It may not seem like good fortune, but we’re so much better off than many others in our country and our world.