The three most significant investment risks and how to avoid them
“The greatest risk on earth is run by the people who never take the smallest risk.” That’s how philosopher Bertrand Russell once described the benefits of risk-taking.
If you’re willing to take well thought-out risks when investing, you can build a fortune over time. On the other hand, if you avoid all risks and keep your money under a mattress (or in a savings account), your savings will dwindle over time due to inflation.
Does the risk of loss still scare you away from investing? The better informed you are, and the more you know about the dangers, the less you need to fear. In this article, you’ll learn about the most significant risks in investing and how to manage them.
Market risk describes the possibility that a significant external circumstance, such as war, political regime change, natural disaster, or pandemic, will negatively impact the financial markets. For example, throughout stock market history, stock market crashes have occurred.
So what is the best way to deal with market risk?
Once again, the keyword diversification comes to mind. A broadly diversified portfolio will withstand market risk better than a non-diversified portfolio. However, all asset classes could be affected; they all react somewhat differently to market conditions.
While your broad portfolio won’t be wholly spared from a financial crisis, history shows that you’re still better off investing than leaving your money in a savings account. Even in times of wars, terrorist attacks, depressions, and recessions, markets have always recovered. Since the late 1950s, for example, the S&P 500 has averaged 8% annual growth.
Entrepreneurial or business risk is perhaps the best known and most feared investment risk. This is the risk that an investment will lose value if something happens to a business or even busts. Unfortunately, the number of possible dangers (such as disappointing earnings reports and management changes) that come with owning a company’s stock is endless, and predicting those risks is next to impossible.
You guessed it – the easiest way to mitigate this risk is to diversify your portfolio. If no single company makes up more than 5% of your portfolio, even its insolvency can’t hurt you.
Money has limited or no value if unavailable as soon as you need it. The rapid availability of money is called liquidity. Liquidity risk refers to the risk of having to liquidate, i.e., liquidate, assets on unfavorable terms. This is the case with real estate, for example. If you want to access your assets quickly, it can be challenging to obtain a reasonable price for a property at the desired time.
If you value that your investment is profitable and readily available, you should invest in reasonably liquid assets. Otherwise, your investment is at significant risk. With UnitPlus, you have the first bank card that invests your money in a broad, sustainable ETF portfolio and allows you to use your money whenever you want.
The bottom line – how to manage risk
By focusing on a broad, diversified portfolio, you minimize market and business risk. And if you keep enough cash on hand for your immediate expenses or make only very easy-to-sell investments, you also manage liquidity risk. Couple this with patience to weather short-term turbulence, and you’ve got nothing standing in the way of your successful investment plans.
So the bottom line is: diversify, wait and invest in liquid assets. If you follow this advice, you can easily manage the risks of investing.