Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, March 29, 1993                   TAG: 9303290010
SECTION: MONEY                    PAGE: A6   EDITION: METRO 
SOURCE: MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

FACING UP TO THE RISKS THAT GO WITH INVESTING

The quandary most people face, however, is that every type of investment carries some risk.

It's axiomatic that the value of stocks and stock mutual funds often goes down, sometimes for long periods.

Now those who invest in bank certificates of deposit have discovered their own problem as interest rates have tumbled. CDs, considered among the safest of investments, clearly carry a risk of low return.

Even worse is the risk that a CD investment will erode over time through inflation, although the principal is protected. Even in the heady days of a decade ago when CD rates soared, the return fell short of double-digit inflation.

Andrew M. Hudick of Fee-Only Financial Planning Inc. of Roanoke said all investments involve risk because the future is uncertain.

"The expected return an investor anticipates through income and/or capital appreciation may differ considerably from the actual realized return," he said.

"The difference between the expected return and the actual return is the risk associated with investing."

He categorized risk in two ways.

The first is called "systematic risk."

With systematic risk, Hudick said, the returns of various types of assets tend to move together. "There is a systematic relationship between the market changes and the individual investment changes."

In other words, the variation in return is caused by factors that affect the prices of all comparable investments.

Some examples of systematic risks are those related from gains or losses based on investors' reactions to marketplace events, from fluctuation of interest rates and from changes in other economy forces, such as inflation.

Hudick said systematic risk is not "diversifiable" because risk cannot be reduced through the construction of a diversified portfolio.

In short, all similar investments will act together, he said, as they are subjected to these various forces.

The second risk category is unsystematic.

With this type, the risk of return is unique to a specific firm, industry or property, he explained.

Hudick said the risk of owning unsystematic investments can be reduced through diversification.

His examples of this category are factors resulting from the nature of a business and losses or gains associated with an enterprise's debt and equity.

Hudick said unsystematic risk applies only to an individual asset, not to an asset class. Thus, there is no systematic risk between the source of the risk and the market as a whole.

A portfolio comprised of 10 to 15 unrelated types of assets, he said, can virtually eliminate the impact of unsystematic risk on the portfolio as a whole.