Understanding Investment Risk The NorthStar Group Brian Bevan Sharon Stout Financial Advisors November 14, 2014 2014 Morgan Stanley Smith Barney LLC. Member SIPC. CRC793023 January 2014 Expires: February 2015
Understanding Investment Risk Many factors can play a role in the potential risks and returns associated with an investment. A thorough understanding of the risks involved with investing is important when selecting the investments that are right for you. This presentation will provide an overview of investment risk and help you to understand how to manage this risk when developing an investment strategy and selecting investment options. Presented by the NorthStar Group at Morgan Stanley Job Club Friday November 14, 2014 2 PM to 4 PM 2014 Morgan Stanley Smith Barney LLC. Member SIPC. 2
Why Are We Here Today? Define investment risk Identify the various types of risk, including unsystematic and systematic risks Examine the relationship of risk and return Discuss techniques for managing investment risk and balancing risk and return 3
What Is Investment Risk? In the simplest of terms, investment risk can be described as uncertainty The uncertainty that the return on an investment may vary from its expected return The uncertainty that an investment may result in the potential loss of income or principal 4
Types of Investment Risk Unsystematic Risk Systematic Risk 5
Unsystematic Risk Refers to risk factors that are usually unique to a particular investment, company, industry, or market sector Also known as diversifiable risk Unsystematic Risks Business Risk Business Cycle Risk Credit Risk 6
Business Risk The risk of a decrease in a security s market value as a result of the challenges of doing business in a particular industry or environment Competitive Environment Market or Technological Changes Poor Management 7
Business Cycle Risk The risk that a company s business and, therefore, its revenue and earnings are tied to economic activity or market trends 8
Credit Risk The risk that a company may default on its promise to pay creditors and to make interest and principal payments to bondholders 9
Minimizing Unsystematic Risk Diversification Issuers / Companies Industries Market Sectors 10
Systematic Risks The risk that a security s price will decrease based on the overall performance of the market or the economy Also known as non-diversifiable risk Results from overall market volatility and changing economic conditions affecting all securities with a particular asset class Systematic Risks Market Risk Purchasing Power Risk Interest Rate Risk Currency Risk Political and Legislative Risk 11
Market Risk The risk of a decrease in a security s market value due to an overall decline in the market DOW Jones Industrial Average Source: Yahoo Finance. 01/07/14 12
Purchasing Power Risk The risk that an investment s return will not keep pace with inflation Also known as inflation risk Impact of Inflation ($) 8 7 7.37 7.87 6 5 4 4.42 5.82 3 2 1.31 2.78 1 1960 1970 1980 1990 2000 2010 2013 Source: Bureau of Labor Statistics Inflation Calculator http://bls.gov/data/inflation_calculator.htm. 01/07/14 13
Interest Rate Risk The risk is that the value of a security will change due to fluctuating interest rates in the market Interest Rates Bond Prices 14
Currency Risk The risk that a fluctuation in exchange rates between currencies will negatively affect the return on foreign securities USD to EUR Source: Yahoo Finance, 01/08/14 15
Political and Legislative Risk The risk that a security s value may be affected by political and legislative changes that affect ownership rights or the business environment 16
Liquidity Risk The risk that a regular market for a security will not continue to exist resulting in the inability to sell and/or the loss of market value 17
Minimizing Systematic Risk Asset Allocation Equities 55% Fixed Income 40% Cash 5% The pie chart on this slide is for illustrative purposes only and is not a recommendation of any particular asset allocation. 18
Return Risk and Return The amount of risk associated with a particular investment is closely related to its expected return: The greater the risk, the greater the potential return The less risk, the lower the potential return Risk and Return Comparison Small Company Stocks Large Company Stocks Fixed Income Securities Cash / Cash Equivalents Risk 19
Portfolio total Risk Balancing Risk and Return Diversification Asset Allocation Managing Risk Number of Securities and Asset Classes 20
Selecting the Right Investments Risk Tolerance Investment Objective Time Horizon 21
Selecting the Right Investments Risk Tolerance Investment Objective Time Horizon Diversification Asset Allocation Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. 22
Your Financial Advisor Team at Morgan Stanley Our Financial Advisors can provide Access to intellectual strength and global resources of Morgan Stanley Financial solutions that address your specific needs and goals The NorthStar Group Brian Bevan and Sharon Stout Financial Advisors 801-322-4711 801-322-7695 NorthStarGroup@morganstanley.com Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not fiduciaries (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. 23