Types of Investment Risk: Reinvestment Risk
Published on June 25, 2013
We are in the middle of a series breaking down the various types of investment risks. You can read the introduction here. We are posting one article covering one risk each weekday until the series is complete.
Yesterday we covered Interest Rate Risk, and today we are covering...
Risk #12: Reinvestment Risk
Description: When an investment matures, returning the principal back to the investor, the investor may face an inability to find a new investment that achieves the same returns or income that was provided by the previous investment. This risk is especially applicable to investors who depend on a certain level of income from their investments.
Primarily Applies to... All investments are subject to this risk at some point.
Real World Examples: Any bond or investment that matures or goes full cycle, returning capital and generating a need to find a replacement investment.
Extreme Avoidance Measure: Only invest in assets you never intend to sell.
Potential Mitigations: Ladder investment maturities such that your reinvestment needs do not all come up at once and diversify into longer-term real estate or equities that pay a steady dividend.
Stay tuned, tomorrow's highlighted risk is: Jump/Event Risk.