5 Investment Risks Investors Need to be Wary of and Tips on How to Mitigate Those Risks
The role of financial advisers is to help you understand different types of investment risks you have to bear so that it becomes easier to manage your finances. Moreover, controlling investment risks will become easier when you utilize strategies such as diversification and long-term investments.
Our aim here will be to look into different types of investment risks and what steps you can take to mitigate them.
Different Investment Risks and How to Mitigate Them
Investment Risk #1: Inflation Risk
Most financial advisers tell investors to be wary of inflation risk. The main problem with inflation is that it lowers your buying power as well as reduces returns you are able to earn out of your investment.
If your investments and savings are not able to outpace inflation then one option is to invest in growth-oriented alternatives like stock mutual funds, stocks, variable annuities and similar other options.
Investment Risk #2: Interest Rate Risk
Fixed income investments such as bonds are usually very sensitive to changes taking place in interest rates. As for instance, in case there is a rise in interest rate then your investments value falls. On the other hand, the value of existing bonds increases when interest rates start falling.
Thus, these fixed income options should be a part of your portfolio along with other investment options so that you continue to receive steady returns even when interest rates for bonds and other fixed income investments fluctuate.
Investment Risk #3: Economic Risks
During economic downturn, earning capacity of most firms gets affected, which in turn effects the returns you are able to earn from your investments. In such situation, it is common for large industries to take longer to adjust to such economic condition.
You will be able to protect your interest by making long term investments since such investments are able to withstand negative effects of such economic downturns and recuperate over a period of time.
Investment Risk #4: Market Risks
When financial markets go through a downturn, it tends to have a negative effect on all the securities. After that, how well securities are able to recover depends a lot upon their fundamental strength. You also need to be aware of the fact that all investments are affected by market risks whether they are bonds, stocks, real estate or any other type of investment option.
According to financial advisers, similar to economic risks, the solution lies in making long term investments which are able to withstand effects of such downturns and continue to deliver returns as expected.
Investment Risk #5: Other Risks
Certain events can result in sudden drop in the value of stocks you hold. As for instance, if a company's president suddenly expires then it will result in drop in firm's stock and in turn, your returns will also get affected. Moreover, it is nearly impossible to predict such risks and as such, the only way you can mitigate such risk is by properly diversifying so that your returns are not affected by any single market event.
As we can see there are different investment risks and by controlling them you will be able to improve the returns you are able to earn.