All markets  are subject to several external forces and shocks such as political, geographic, economic, domestic, international and many others that can push the value of your investment either up or down. Although its common to hear people discussing various types of risks, many investors do not typically remember to account for another equally important factor: how much the investment can decline and for how long. Predicting investment losses involves understanding the potential risks that each type of investment carries.

Relative Risk Profiles of Different Types of Investments

Money kept in the bank is usually considered free of risks. The risk involved in investing in bonds, equity funds, individual stocks, foreign funds, and futures increases as you move up the ladder in that order. Likewise, the potential gain or loss increases in similar fashion. Its generally difficult to predict with a high degree of accuracy how much you can lose with each investment.

Bond Funds: These are considered the safest investment after cash in the bank. The potential loss when investing in bonds is usually a few percentage points. Emerging market bonds, however, tend to be much riskier than domestic bonds. In fact, emerging market bonds are considered to carry roughly the same risk as equities.

Equity Funds: Equity funds tend to be very volatile with large price swings in either direction. But generally, its quite rare to find an equity fund that drops by 30% over a given period of time. Equity funds are considered medium-to-high risk.

Individual Equities: Individual stocks carry a higher risk than either bond funds or equity funds. If the company runs into really hard times, its stock price could plunge by as much as 50% or more in a matter of weeks. Having a portfolio with 10 to 30 stocks, however, generally minimizes this risk.

Currencies: Currencies tend to be highly volatile, rising or falling by as much as 20% to 30% in the space of a few months. If you own foreign equities, you might find that the losses are compounded by large currency losses. On the brighter side, capital losses can sometimes be counterbalanced by currency changes. This is, however, quite a risky game that you need to play with lots of caution.

Futures: Futures are considered one of the most risky forms of investment. If things go wrong, its easy to lose more than 50% of your portfolio.

Equity and bond cycles vary from a few weeks to a few years. Thus, you could find your equities or bonds portfolio yielding negative returns for that length of time. The reverse is also true, and you can find your equities or bonds portfolio yielding positive returns continuously for a number of years. There are also mini-trends that appear within the longer-term trend. You should therefore work on the premises of what you can afford to lose.

Predicting investment losses helps you determine what investments are best suited for you. There are some investors who prefer higher risk investments due to their potential to give bigger returns, while there are others who prefer lower risk investments with slow but steady returns. Ultimately, its your prerogative to decide which investment style you are most comfortable with.