Understanding Investment Risks and How To Avoid Them

The increasing interest of the community in investing in order to secure their financial future resulted in a number of investment options. Regardless of the investment type you choose, all investments carry some degree of risk. Returns are directly proportional to risks i.e. high return high risk. Meaning, the higher the return you want from your investment, the higher the risk you have to bear.

Types of Investment Risks

Investment risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare. Here are some investment risks that you need to be aware of:

Market risk

It is the fluctuation or decrease in the market that is affected by various things or current events, such as political conditions, natural disaster, recent news, and many more. There are 3 types of market risks, including:

Equity risk, occuring in stock investment
Interest rate risk, occurring in investment in the form of debt such as bonds
Currency risk, occurring in foreign investments

Liquidity risk

The risk in the case you are having problems in withdrawing return on investment in the form of cash and the corresponding amount when you need it. One example is in real estate investment, you are not able to sell your property within a short period of time due to many factors. Or, in the event that you have to sell it below the market price so that your property sells quickly.

Credit risk

This risk occurs in the investments in the form of debt such as bonds, in the event that the company that issued the bonds is facing some financial problems. As a result, the company fails to make interest payments or loan principal to the investors based on the agreement.

Inflation risk

Inflation is when there is a general and continuing increase in prices. Inflation causes the currency with the same nominal value to decrease as opposed to the past. Some types of investments do not provide any protection against this risk, so you will get the same amount of return on investment that is unaffected by inflation. Other investments, such as stock investment, provide protection by adjusting the price offer with the current inflation rate.

Horizon risk

This risk is a condition when you are forced to stop your investments prematurely due to several factors. In case one of your family members falls ill, you might sell your gold investments that you actually want to hold for the next few years. You might also sell the stock investments you own, even if the prices fall, just because you are in dire need of funds.

Anticipating Investment Risks

Although you are prepared to take the risks that may occur in investment, you will want to reduce the risks, won’t you? No need to worry, as you can implement these strategies:

Asset allocation

This strategy means to allocate your investment funds to different asset classes, such as stocks, bonds, property, and others. As mentioned above, some types of risk only occur in certain investments. Based on this, you can choose which investment gives you the highest percentage of investment funds. Or in other words, which risk that you are willing to take so you will be well prepared to invest a huge portion of your funds in that investment.

Diversification

Diversification is dividing asset classes you selected into different types of investment. For instance, in stock investment, you may want to invest your funds in different types of business industry. The purpose is to divide the risks when one of them experiences a decline. Hence, you should choose different types of industry so that your investments will not simultaneously experience a decline when a particular industry has not been doing well.

Now that you understand the risks and how to anticipate them, are you ready to make an investment? If the answer is yes, you can start investing through the Nanovest app which you can download from Play Store and AppStore. Through this application, you can invest in trending cryptocurrency easily. Beside that, you can also invest in global stocks if you want to allocate your investment funds to different asset classes. If you have any further questions about investing, Nanovest customer service will be ready to help you. So, you can make any investment smoothly and safely.

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