You should carefully consider your risk tolerance, time horizon, and financial objectives before making investment decisions. By investing, you run the risk of losing money or losing buying power (where your money does not grow as fast as the cost of living). Risk can be classified into many different categories, and by knowing those categories you can better manage expectations and avoid or reduce certain kinds of risk.
General Investing Risks
There are risks involved with investing, including loss of principal. There is no assurance that the objectives of any strategy or fund will be achieved or will be successful. No investment strategy, including diversification, can fully protect against or eliminate market risk or loss. When screening potential advisors and investments, investors should bear in mind that past performance does not guarantee future results.
For more information about general investment risk, see FINRA’s page Managing Investment Risk.
Market risk (also known as systematic risk) affects most or all securities in the marketplace. As a result, market risk cannot be fully diversified away. Some common factors that broadly affect securities are changes in interest rates, inflation, currency exchange rates, and the political and economic environment. In the short term, security prices can fluctuate dramatically in response to these developments. Different companies and different asset classes (such as cash, bonds, and equities) can react differently to these developments. In general, the worst effects of market risk can be mitigated in part by investing across asset classes that tend to perform differently under the same market and economic factors.
Non-systematic risk refers to risks unique to a company or a narrow group of securities that are closely related. Non-systematic risk is intensified in the absence of diversification or when investing in only one company, or being overly concentrated in one business. Non-systematic risks recognizes that the performance of a company is affected by managerial risk (such as poor strategy or management) and other company-specific factors that may cause the company to under-perform while the industry or sector of that company actually outperforms. Investing in broad portfolios (such as sector or index portfolios) can reduce company-specific risk, but non-systematic risk sometimes remains. For example, one company may have an outsized influence on a portfolio. At the same time, a social or political development can greatly impact a sector and not the broader market (such as a change to tobacco regulations). The worst effects of non-systematic risk can be avoided by investing across multiple sectors that have different revenue sources. Non-systematic risk can be reduced further by investing across asset classes that tend to perform differently under the same market and economic factors.
Risks of Investing in Different Assets
Commodity Interest Risk
The risks of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering to trade or to authorize someone else to trade for you, you should be aware of the following: If you purchase or sell a commodity futures contract or sell a commodity option or engage in off-exchange foreign currency trading you may sustain a total loss of your initial investment, margin funds or security deposit and any additional funds you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you don not provide the required funds within the prescribed time, your position may be liquidated at a loss and you will be liable for any resulting deficit in your account.
Please go to our CTA Disclosure Document for additional details regarding commodity interest risks
Risk of Inverse and Leveraged ETFs
The Securities and Exchange Commission (SEC) and FINRA, the organizations that regulate the securities industry, issued an Investor Alert on June 31, 2009 advising retail investors of the risks associated with “leveraged and inverse ETFs.” Specifically, they warn that these instruments, by design, can deviate from—and may underperform relative to—their benchmarks for periods longer than one trading day. These deviations may be substantial for longer periods.
Leveraged ETFs are securities that attempt to replicate multiples of the performance of an underlying financial index. Inverse ETFs are designed to replicate the opposite direction of these same indices, often at a multiple. These ETFs often use a combination of futures, swaps, short sales, and other derivatives to achieve these objectives. Asa result, the risks of inverse and leveraged ETFs are broadly similar to the risks of commodity interests.
Customers should carefully evaluate leveraged and inverse ETFs by looking closely at their prospectuses and considering their own financial goals and risk tolerance before investing in these securities. Buy-and-hold investors should be particularly cautious when evaluating these investments, because they may not track their underlying indices over longer periods of time and may have additional risks inherent to the nature of their underlying assets. Even experienced retail investors should reflect carefully before retaining these securities longer than one trading day.
Foreign Investment Risks
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations can involve additional risks relating to political, economic, or regulatory conditions in foreign countries. These risks include fluctuations in foreign currencies; withholding or other taxes; trading, settlement, custodial, and other operational risks; and less stringent investor protection and disclosure standards in some foreign markets. All of these factors can make foreign investments, especially those in emerging markets, more volatile and potentially less liquid than U.S. investments. In addition, foreign markets can perform differently from the U.S. market.
There are risks associated with investing in an initial public offering (IPO). Investors should read the offering prospectus carefully and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance.
The SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin providing investors with information they should consider when investing in the shares of a new public company. For more information, read the SEC’s Investor Bulletin on Investing in an IPO.
Bonds and Fixed Income Investing
Interest Rate increases (decreases) can cause the price of a debt security to decrease (increase). Longer-maturity bonds typically incur more extreme price changes based on changing interest rates than those bonds with short maturities.
Credit Risk Types
- Downgrade Risk: The chance that bonds will have their credit ratings reduced, which could reduce the future income expectation of the bond. Specifically, companies issuing high-yield bonds are generally not as financially strong as companies rated investment grade.
- Default Risk: The chance that a bond issuer will fail to make its scheduled interest or principal payments.
- Credit Spread Risk: The chance that the market value of a bond will decline and/or the price performance of a bond will be worse than that of other bonds. An example would be the yield premium between Treasury bonds and non-Treasury bonds where the spread can increase with the Treasury bond price going up and the market price of the non-Treasury bond declining.
Risk Unique to Saffron Capital
The model portfolios of Saffron Capital contain individual securities that rise and fall in value. As a result, the model portfolio values will also rise and fall in value. You can lose money even if you are well-diversified. When the stock market suffers widespread declines even well-diversified and extremely conservative investments are likely to fall in value. Additionally, exchange-traded funds (ETFs), mutual funds, and American depository receipts (ADR) included in a model portfolio are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.
Model portfolios that seek to actively manage risk or to preserve capital can be effective, but are no guarantee that losses can be avoided.
Finally, model portfolios to seek to avoid risk by converting risky investments to cash also have unique risks. First, there is a risk of exiting the market too early and missing potential market gains. Second, when switching from cash back to risky investments, there is a risk of entering the market too soon or before market prices have stopped falling. In both cases, there is no guarantee or warranty that the trading signals that guide the model portfolio will be timely and can predict or respond to market tops and bottoms.
Backtesting & Hypothetical Trading Results
Model portfolio performance figures may be based on backtesting, simulation or hypothetical trading results. Hypothetical results are intended for illustrative purposes only. Hypothetical performance results, such as backtesting, have inherent limitations. Specifically, no representation is made that any fund or account will or is likely to achieve profit or loss results that match model backtesting exactly. In fact, there can be sharp differences between hypothetical performance results and the actual results realized by any trading program. There are several factors that account for the difference between backtesting and actual results that investors should bear in mind:
- Hindsight – Model backtesting and hypothetical performance results could be biased given knowledge of about the past, prior prices and risk events that impact model design. In practice, future prices and risk events could be materially different.
- Absence of true risk – Hypothetical trading does not involve true financial risk. As a result, no hypothetical trading record can completely account for the impact of financial risk and the potential that human influence may impact model-based trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results.
- Model changes – The hypothetical performance results presented are intended to represent the application of the quantitative models as currently in effect on the date prepared and first written. There can be no assurance that the models remain the same in the future or that an application of the current models in the future will not be subject to some minor or major change.
Processes, Procedures, Systems and Markets
On occasion things can go wrong and you need to be prepared. For example, computers and internet capabilities can crash and orders to buy or sell securities can pile up at the marketplace where an order is to be executed.
While we have put significant resources into our processes, procedures, and the testing our control systems, you should expect that computer glitches, slowdowns, and crashes beyond our control may occasionally occur.
Similarly, our bank custodian, like any financial institution, cannot guarantee that you will always be able to access their website or to place the trades you want, when you want to. Finally, the marketplace that we send orders to for execution may, from time to time, suspend trading or will be unable to handle all the orders they receive.
Because we are not liable for any damages or losses that you suffer if you cannot get access our website or your account at the bank custodian. make sure that you are prepared to handle the problems we have described here and others described in your customer agreement as these are risks that you bear.