There are four different types of risk that will affect your portfolio and it is important to know what they are so you can ensure balance throughout your holdings. Generally, risk can be defined as "exposure to loss or misfortune", but knowing the specific risks will assist in limiting unnecessary exposure in your portfolio.

Most people believe market risk is the risk their investments will make or lose money based on the daily fluctuations of the market. This is partially true, but stock price fluctuations are determined by numerous factors such as company performance, earnings predictions, political and/or economic factors. To make the issue clearer market risk can be broken down into two subsections: unsystematic risk and systematic risk. Unsystematic risk is the part of risk that can be diversified away. Asset allocation (selecting between bonds, mutual funds or real estate) is responsible for eliminating up to 90 percent of a portfolio's risk. Mutual funds and exchange traded funds are an excellent source of diversification because one investment fund can invest in numerous individual investment products and sectors of the market. Systematic risk, however, is the part of a portfolio that can not be removed through diversification. If the entire stock market suffers a severe decline your securities will most likely lose value as well.

For fixed income investors the main source of risk isinterest rate risk. It is the risk that interest rates will rise and reduce the value of an investment bond. For example, bond prices generally move in the opposite direction to interest rates.

As interest rates rise, bond prices generally fall, and vice versa.

For investors in corporate bonds the purchaser is faced with the uncertainty that the issuer may default or become unable to pay its obligations when due. This is called credit risk, and for some investors it can be just as important to understand as interest rate risk.

The last of the risk categories isinflation risk. Therising cost of goods and services will reduce the value of your investments and your buying power over time. The current rate of inflation in Bermuda is approximately three percent a year, meaning $100 today will be worth only $86.26 in five years.

So, if your salary and investments are not making at least three percent a year to keep pace with inflation you are not staying ahead of the rising costs of goods and, in real terms, you are losing money.

Being able to evaluate all the risks in the market is complicated, but knowledge of some basic facts on what risks your portfolio is being exposed to is always important.

Too many people delay planning for their financial future or hope it will take care of itself. In fact, the more involved one becomes in understanding what the investment risks are, the better their probability of financial success.

Jeff Wiebe is an account manager at LOM Asset Management Ltd. He can be reached via phone at 294-7037 or fax 296-5597.