How To Invest Based On Risks
Are risks to be taken or avoided? This is a very confusing area that needs to be addressed by taking into account several different factors, for instance, your age, your risk-taking ability, your ability to handle wins & losses, and so on. For example, a teenager would not mind going for a drive along a new route in the night. However, if you ask a 35 or a 40-year-old if he/she would do the same, the answer would be somewhere between a maybe and a no. The reasons could be anything from it is not as safe as it is an unfamiliar route. This depicts a perfect example of how risk is related to age.
Different Types of Risks
- Low Risk – People invest in low-risk investment plans that mostly have a foreseeable return in terms of revenue. They make low-risk plans as the bulk of their assets.
- Medium Risk – People invest in medium-risk investment plans that assure them with a stable return but allow mild flexibility in terms of capital appreciation. Overall, their investments are relatively safe.
- High Risk – People jump at the sight of a high-risk investment proposal mainly because the returns are mind-blowing. However, you should invest only so much that you can afford to lose or else you could turn bankrupt in seconds.
Let us look at the different types of risks that you might encounter while investing. Read the full review here.
- Market Risk – Here the value of the investments will depend directly on the economic developments and other events of the market. These include equity risk, currency risk, and interest rate risk.
- Liquidity Risk – The risk that arises when you sell a particular asset and you expect to gain money that is equivalent to the asset’s value.
- Concentration Risk – The risk that arises because you tend to focus all your investments in one particular asset class.
- Credit Risk – The risk that emerges mainly due to government actions and results in a change in the value of your credit assets including bonds and other debt investments.
- Reinvestment Risk – The risk that arises when you reinvest your principal amount at a different interest rate, mostly in something that is lower.
- Inflation Risk – The risk that increases with inflation and prevents your to keep up, especially in terms of disposable income and purchasing power. It is mostly seen in the case of shares and real estate investments.
- Horizon Risk – The risk that arises mainly due to unforeseen circumstances such as loss of job, natural calamity, etc.
- Longevity Risk – This risk crops from the fact that you may not be able to provide for yourself in the long run, as you may deplete your savings, especially during your retirement period.
- Foreign Investment Risk – It is the risk that arises when you lose money while investing in foreign currencies or in another country.
Not everyone is the same when it comes to the matters of investment. While some are willing to take higher risks, others prefer low risks. Hence, it is up to you to evaluate your expectations and risk-taking potential before you set foot in the investment world. The key to good investments lies in making informed decisions related to investments.