Global development and digitization have reached a scale where making an investment is possible for almost everyone. Even though there is the possibility of receiving a positive return, in the long run, the same cannot be said for the short run. Also, the market is so dynamic that it keeps fluctuating. It is tempting to make financial decisions to save oneself from an immediate loss at times like this. With investment now accessible to all, it is essential to become aware of the different risks involved in investing and how to fight them. Here are a few of the different risks involved in investing.
This is the biggest risk in investing. With the market changing daily, the value of winning money from Lottery Sambad or other investments can go up or down. Market risk can be further categorized into equity, interest rate, and currency risk. Equity risk arises from the fluctuating market prices of the different shares, which depend on demand and supply. Interest rate risk comes into existence because higher interest rates drop debt investment.
When you cannot sell your investment at a price you invested in, and you want to get your money out for a reason, you face liquidity risk. Sometimes, to receive the money-back in time of emergency, one needs to sell the investment at a lower price. Consider if you have won a lottery in the Teer Result, you invested $10, and its market price drops to $8, and if you urgently need the money, you will have to sell it at $8 instead of $10 or any higher value. In this situation, you face liquidity risk.
In inflationary risk, the investments you make have a risk of declining value. The value of the inflationary risk is a result of increasing inflation. Inflation reduces the purchasing power of money. Debt investments like bonds are particularly prone to inflation.
If you invest all your money in one type of investment or portfolio, you take a concentration risk. It is because if the value of investment reduces, all the money invested in it will face a loss. The easiest way of mitigating the concentration risk is by diversifying the investment.
Why Take Risk By Investing?
In addition to these, there are many other kinds of risks like credit risk, reinvestment risk, horizon risk, longevity risk, foreign investment risk and business risk. Irrespective of the type of investment that you make, there is always a risk factor associated with it. A successful investment is one where the investor manages the risk instead of avoiding it.
Even though no investment is purely risk-free, the degree of risk differs from one investment to another. Instead of avoiding total risk, one should know how to take calculated risks to get better rewards. The key to successful investing lies in being informed about the risks involved and taking a calculated risk after it instead of blindly investing. Further, there are plenty of ways to mitigate investment risks. Here are a few ways to mitigate investment risks.
Asset Allocation Strategy
Asset Allocation refers to investment in more than one asset to reduce the investment risk in order to receive optimal returns. Different investment types are balanced during Asset Allocation to meet the investment goals. To minimize the investment risk, investing in a combination of asset classes is recommended. You can go for one investment that has high risk and high return and the other in low risk and low return.
Diversify The Investment Portfolio
Diversifying the investment portfolio is the best way of mitigating investment risks. It is essential to ensure that you do not put all the eggs in one basket. Diversifying the investment portfolio reduces the overall portfolio risk.
Monitor The Investments
The asset allocation that worked one year ago will not work again at the present time. Therefore, the investment risk also keeps fluctuating. It, therefore, becomes essential to monitor the investment regularly. Keep track of the investment holding to ensure that you can keep a tab on the investment risk.
Lastly, it is essential to identify your risk tolerance capacity. Everyone has different risk tolerance. Take only the investment risk that you are willing to take. After identifying your risk tolerance, you can invest in different portfolios accordingly.