Investment tips: How much risk should I take?
As they say, nothing great was achieved without risk. In an ideal world, we would be able to invest our money with little danger of anything going wrong, and we would see a big profit in return. There are various risks you may subject yourself to by taking out a certain investment. By risk, we mean a situation that could potentially arise and have a negative impact on the value of your investment. But, remember, it’s important to consider risk and return; while there is potential to lose, there is also potential to gain.
Different types of investment risk: •Liquidity risk This type of risk is when limited opportunities mean that an investor cannot purchase an investment when they want to or in the quantities they need. •Business risk Next we have business risk, which is a general term used to describe the risk linked with a certain security. Companies operating within the same sector are going to have similar risks. • Taxability risk This refers to a situation whereby a security that came with a tax-exempt status initially then loses this status. This applies to municipal bond offerings. •Credit risk Credit risk is when a bond issuer cannot make the principal repayment or is struggling to make the expected interest rate payments.
•Market risk Market risk cannot be controlled by diversification; it is a risk that will impact all securities in an identical manner. This is also known as systematic risk. •Liquidity risk Finally, reinvestment risk involves a situation when the investor is often forced into buying securities that do not offer the same amount of income as their previous investment. This is because the environment is one whereby interest rates are declining and bonds are due to be called in. • Interest rate risk This refers to a situation whereby interest rates increase, which could cause a fixed-rate debt instrument to lower in value. Interest rate risk is something you need to be concerned with if you buy bonds or securities with a fixed rate of return.
How to determine how much risk to take:
Of course, the cash that you have available to invest is going to be a major determining factor. If you are strapped for cash at present, the last thing you should be doing is putting all of your money into a high-risk investment portfolio. Aside from this, you need to consider how important an investment portfolio is to your financial well-being, and how long you will invest for. Time plays a crucial role when it comes to investment portfolio management. If you have got time on your side, you can afford a greater degree of risk, as your investments will be able to overcome any difficult periods.
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