What it is
Reinvestment risk is the possibility that when you take money or receive earnings from an investment, you won't be able to reinvest that money for the same rate of return you were getting before.
Let’s say you bought a bond that gave you interest payments of 5% every quarter for 1 year. Using your earnings, you decide to invest in bonds again hoping to get the same or better rates.
However, you found that the bond market currently only offers 4% at best. This is reinvestment risk at work.
What it means for you
You must keep this risk in mind when choosing what to do with your investment profits or when deciding whether to switch from 1 investment to another.
Different factors can affect how investments perform and how much you might earn from income-paying investments, like changes in interest rates.
Accounting for reinvestment risk may allow you to maintain realistic expectations of potential future returns.
You can also consider ways to manage this risk like diversifying your portfolio or laddering fixed-income assets, among other methods.
_large.png)
