Matson Money is a financial advisory firm that provides investment management services. Understanding the potential risks associated with any investment strategy is crucial. This article outlines key investment risks, including those specific to strategies employed by Matson Money.
Specific Risk and Diversification at Matson Money
Specific risk, also known as unsystematic risk, pertains to a particular asset or industry. An example could be a sudden employee strike affecting a specific company’s stock. Diversification is a primary method to mitigate this risk. Matson Money aims to minimize unsystematic risk through broad diversification across various securities. However, specific risk can still exist within individual asset classes like micro-cap or emerging markets.
Country-Specific Market Risk
Investing in a single country’s market index ties performance directly to that nation’s social, political, and economic conditions. This concentrated approach can lead to higher volatility compared to geographically diversified investments.
Credit Risk and Government Agency Obligations
Credit risk involves the potential inability of a security issuer to make interest payments or repay principal. Credit rating downgrades or perceived financial weakness can impact a security’s value. Government agency obligations carry varying degrees of credit risk. Securities backed by the full faith and credit of the U.S. Government generally have lower risk than those issued by state or local agencies, or private entities. Even U.S. government agency securities carry a risk of non-payment.
Cybersecurity Risk in the Financial Industry
Matson Money, like other financial institutions, faces cybersecurity risks due to its reliance on technology and information systems. Breaches could compromise proprietary information, client data, or fund assets, leading to data corruption or operational disruptions.
Emerging Markets Risk and Volatility
Emerging market countries often experience significant economic and political volatility. Their stock markets tend to be smaller, less liquid, and more risky than developed markets. Investing in these markets presents challenges due to potential restrictions on investment and withdrawal of assets. Frontier markets, with even smaller economies and less developed capital markets, magnify these risks.
Equity Market Risk and Market Cycles
Equity market risk acknowledges that even long-term investment strategies cannot guarantee profits or eliminate losses. Market fluctuations, driven by economic, political, and company-specific factors, impact the value of equity securities. Stock markets historically move in cycles, experiencing both rising and falling prices.
Foreign Government Debt Risk and Default
Foreign government debt carries the risk of non-repayment of principal or interest. Factors such as political instability, economic weakness, or insufficient foreign currency reserves can contribute to default. There is no guaranteed legal recourse for recovering losses from defaulted government debt.
Foreign Securities and Currency Risk
Foreign securities are subject to price fluctuations due to economic or political actions by foreign governments and the characteristics of less regulated or liquid markets. Currency risk arises from the potential fluctuation of foreign currencies against the U.S. dollar.
Fund of Funds Risk and Expense Ratios
Investing in funds of funds exposes investors to the performance of the underlying funds. Achieving investment objectives depends on the underlying funds’ success, asset allocation decisions, and investment choices within those funds. Investors also bear expenses of both the portfolio and the underlying funds. Matson Money provides fund prospectus documents with details on mutual funds, ETFs, and associated fees.
Interest Rate Risk and Fixed Income Securities
Fixed income securities are susceptible to interest rate risk. Their prices generally move inversely to interest rates: rising rates lead to falling bond prices, and vice versa. Longer-maturity bonds tend to be more sensitive to interest rate changes.
Market Risk and Fixed Income
Market risk affects fixed income securities, causing their values to fluctuate due to economic, political, and issuer-specific events. Long-term investment approaches cannot guarantee profits in the fixed income market.
Small Company and Micro-Cap Stock Risk
Small-cap (market capitalization of $300 million to $2 billion) and micro-cap (market capitalization of $50 million to $300 million) companies often have lower liquidity and higher price volatility compared to larger companies. They are more vulnerable to adverse economic conditions and may have limited resources. Trading costs are generally higher for these stocks.
Value Investment Risk
Value stocks, priced below their perceived intrinsic value, can perform differently from the broader market. A value-oriented strategy may at times underperform other equity investment strategies. Matson Money’s Form ADV Part 2A provides further details on these and other investment risks. You can find it here: https://www.matsonmoney.com/form-adv-part2/.
