Reinvestment risk is a financial concept that refers to the potential uncertainty and adverse effects investors may face when reinvesting income or principal from a fixed-income security at a different interest rate or yield. It mainly affects those who hold bonds, certificates of deposit (CDs), or other fixed-income instruments.

When an investor purchases a fixed-income security, such as a bond, they expect to receive periodic interest payments or coupon payments. Additionally, upon the bond's maturity, they receive the principal amount back. However, if the interest rates in the market have declined since the initial investment, the investor faces the challenge of reinvesting the income or principal at a lower rate.

This decrease in interest rates could lead to a decline in the overall income earned from the reinvestment, potentially affecting the investor's overall returns. Moreover, it may limit the investor's ability to find similarly attractive investment opportunities with higher yields, ultimately impacting their portfolio's growth.

Conversely, reinvestment risk can also have positive implications if interest rates rise. In such a scenario, investors may be able to reinvest their income or principal at higher rates, potentially boosting their returns.

To manage reinvestment risk, investors often employ various strategies, including diversification, laddering bond maturities, and staying informed about the interest rate environment. Understanding and addressing reinvestment risk are crucial aspects of sound financial planning and investment management, particularly in fixed-income portfolios where predictable income streams are a primary consideration.