We’d all love to reap the rewards of high returns on our investments without risk. But unfortunately, wishing does not make it so. Like it or not, risk is part of the equation if you’re aiming for anything other than preservation of capital — a risky goal in and of itself, since the buying power of your money will slowly erode over time if you don’t outpace inflation. The good news is that there are many ways to manage different types of investment risks.
1. Market Risk
Stock prices rise and fall over time, sometimes dramatically. While this can be thrilling in the case of a run up, it can be stomach churning when prices fall precipitously. Other asset classes are not immune to market risk as the price of bonds, real estate, gold and other commodities can fluctuate as well. However, diversification among stocks, bonds and other asset classes can help balance market risk. Losses on paper are realized only when you actually sell, so take steps to avoid being forced into selling into a down market. Adjusting allocations as you approach retirement or any other need for divestment is another way you can potentially reduce the impact of market risk.
2. Inflation Risk
As alluded to earlier, inflation can eat away your purchasing power over time. Today, many savings accounts don’t even keep pace with inflation — meaning a negative real rate of return on your money. Additionally, while higher inflation generally goes hand-in-hand with more favorable savings account rates, if your money is locked up in a lower-interest/long term CD as rates climb, you can fall prey to the deleterious effect of inflation. Ironically, in this case, risk can potentially help offset risk as often the only way to outpace inflation involves taking on higher risk through greater exposure to equities (and subsequent market risk).
3. Mortality Risk
There are really two types of mortality risk. One is not living long enough, and the other is living longer than you expect (yes, this can actually present a problem despite the obvious benefits). In the case of annuities, there’s the possibility that you don’t live long enough for your premium payments to be worthwhile. For the risk of greater-than-expected longevity, proper planning can go a long way. Target date funds, where assets are rebalanced periodically according to a specific retirement goal date, strive to keep your portfolio appropriately positioned as you approach retirement and can potentially help manage the risk of losses associated with an untimely exit from the market. The principal value of a target date fund is not guaranteed at any time, including at the target date.
4. Interest Rate Risk
Interest rate risk refers to the potential impact that changes in interest rates can have on investment values, particularly bonds and other fixed‑income securities. As of early 2026, the Federal Reserve has maintained its target federal funds rate in a range of 3.50% to 3.75% after a series of rate cuts in late 2025 aimed at supporting economic growth while inflation trends closer to the Fed’s long‑term 2% goal.
To help manage interest rate risk, investors may consider:
- Diversifying fixed‑income holdings across different maturities.
- Limiting excessive exposure to long‑duration bonds.
- Including asset classes that have historically been less sensitive to rising rates.
- Periodically rebalancing portfolios to align with changing economic conditions and time horizons.
Maintaining a well‑diversified portfolio can help reduce the potential impact of interest rate fluctuations on long‑term investment goals.
5. Liquidity Risk
Liquidity, or having immediate access to funds, is an important aspect of investment planning. You never want to be in a position where the need to withdraw funds forces you to incur losses or other penalties. An emergency fund is a good example of the need for liquidity since you never know exactly when disaster may strike. This risk can be mitigated through thoughtful asset allocation that maintains an appropriate cash position at all times.
6. Inertia Risk
This is the risk of doing nothing. And it’s particularly detrimental for younger investors who may benefit most from the effects of compounding. The earlier you start saving, the better your chances of positioning yourself for a comfortable retirement. So especially if you’re young and haven’t already started contributing to your 401(k), the time to start is now
Be aware of risk when in comes to your investments, but there’s no need to be terrified. There are many ways to manage investment risk so you have the potential to grow your nest egg with confidence. Contact NFP's Wealth Management advisors to discuss how to address risk to your portfolio so you can pursue the retirement of your dreams.
