9 Types of Investment Risk You Should Know

9 Investment Risks You Should Know

Investment risk is a reality check. Any kind of investment carries some amount of risk. You will encounter investment risks when you invest. Understand how various risks can affect your investment returns in the article below.

What Is Risk?

Investment risk is the probability of negative financial outcomes rather than expected profit on any particular investment. The possibility of losing the portion or all of the original investment is part of the risk.

9 Types of Investment Risk

1. Market & Volatility Risk

Even if the company performs very well, stocks of the company can still be subject to volatility and market risk. Supply and demand determine stock prices. Stock prices will fall if people pull capital out of the stock market. The market risk is the possibility that a person or other entity would lose money due to variables affecting the overall performance of investments in the financial markets. Diversification among stock and other asset classes can help manage market risk.

2. Inflation Risk

Inflation Risk is the possibility of losing purchasing power due to investments that do not generate returns higher than inflation. If inflation increases at a faster pace than the investment’s returns, the real value or purchasing power of the invested money diminishes. It is crucial for investors to consider inflation risk and aim for investments that yield returns higher than the inflation rate to maintain or increase their purchasing power.

3. Concentration Risk

It is a risk of losing money because your money is concentrated on a single investment or type of investment. Therefore, you need to diversify your portfolio because it will spread the risk among asset classes, industries, and geographic regions, and reduce the concentration risk.

4. Liquidity Risk

Liquidity refers to the ease with which an investment can be bought or sold. The risk of being unable to sell your investments for a fair value when you want to is known as liquidity risk. Some investments, for example, may require you to hold them for a specific period before selling them.

5. Credit Risk

Technically, credit risk refers to the possibility of loss resulting from a borrower’s failure to fulfil the obligation to repay a loan. In bond investment, credit risk is the risk of a company or the government defaulting on a bond they have issued. The bond issuer may experience financial difficulties. Because of it, they can’t pay the bondholders’ interest or principal, defaulting on their obligations.

6. Reinvestment Risk

The risk of generating lower return if you reinvest your investment returns is known as reinvestment risk. This risk is most common in bond investing but can be related to any cash-generating investment. For instance, buying a bond with dropping yield rates brings a risk of gaining a lower yield rate if proceeds from the bond are reinvested in the same bond.

7. Horizon Risk 

Horizon risk is the possibility that your investment timeline (or horizon) will change due to a sudden life event. For instance, losing your job may force you to sell investments to hold for the long term. You may lose money if you have to sell during a down market.

8. Longevity Risk

Longevity risk is the risk that pension funds or insurance companies face when life expectancy and mortality rate assumptions are inaccurate. Longevity risk can be managed to some extent by setting and adjusting the underlying investments, asset allocation, and the amount of income derived from the pension each year.

9. Foreign Investment Risk

Foreign investment risk is the risk of loss when investing in foreign countries. This can include investing in stocks in foreign companies or simply making any investment outside of your country.

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