In general, all investments are subject to some risk or combination of risks. Risk is a deviation from the expected outcome of the investment, which may result in the failure to achieve the investment objectives. Before making an investment, every investor should pay attention and try to understand the risks associated with the investment, as well as their probability of happening, which is an important element in measuring the expected results.
Unlike traditional bank deposits, investment activities can have both positive and negative consequences. In addition, the preservation of investment capital is not guaranteed either. The total value of the investment, including principal and returns, is never guaranteed and may change significantly over time or due to certain circumstances. Historical performance of certain investments or asset classes cannot guarantee similar performance in future periods.
Each investor must understand that all risks associated with the investment, as well as any losses, are the sole responsibility of the investor. Therefore, it is very important to analyze and understand whether a combination of risks, related to certain investments, is acceptable. Many factors can affect the measurement of risk, and there are portfolio management tools to measure and mitigate risk factors. Risk assessment can be done independently by the investor or with the help of professional investment advisors.
Market Risk
Market risk, also known as systematic risk, is the risk that adverse market events, such as macroeconomic factors (interest rates, inflation, recession, currency, etc.), social or political instability in the market, will affect the value of the investment. Unforeseen actions by other investors or other external events. These events often lead to changes in asset prices and increased volatility. Typically, the use of a long-term investment horizon combined with active asset allocation strategies can partially mitigate exposure to market risk.
Liquidity Risk
Liquidity risk refers to a situation in which, at the time of sale of the investment, there is insufficient demand in the market. Some types of assets are almost always liquid. However, other investments may be in a situation where, at the time of liquidation of the investment, there are no buyers in the market or the price level is lower than expected. Periods of illiquidity may result in a prolonged exit from the investment.
Another aspect of liquidity risk is that when the exit from the investment cannot be prolonged and the investor is forced to liquidate it at some point, this may result in a decrease in expected returns and even a partial loss of the principal of the investment. In addition, additional expenses, such as increased sales commissions, additional advertising, investment valuation, etc. may also be generated due to liquidity risk.
Inflation risk
Higher prices reduce the purchasing power of your investment, but if the inflation rate is higher than the real rate of return, direct losses may result.
Currency Risk
Purchasing an asset in another country or currency may result in foreign exchange risk, where the investor may experience unfavorable fluctuations in exchange rates.
Political Risk
Political risk is another risk associated with the local environment, as the value of the investment may fall significantly in the event of political instability, civil unrest and similar actions.
Regulatory Risk
Regulatory or legal risks arise because local governments and other regulatory bodies have a significant effect on the economic environment for investment activities. A stable social and economic environment can positively affect the value of the investment and vice versa. When the government frequently changes legislation, such as imposing additional personal income tax or introducing new taxes in the real estate sector, the investment climate in the region deteriorates and may result in reduced real investment returns.
Interest rate risk
When interest rates rise in the economy, the prices of many assets fall and vice versa. Interest rates also have a significant impact on overall economic activity and borrowing costs.
Specific risk
Specific or concentration risk is risk that is correlated to the global market; this unsystematic risk is specific to certain assets, sectors or locations. The good news is that this type of risk can be almost completely eliminated by diversifying investments.
Project Risks
All investment opportunities, which are offered to investors on specialized websites, must go through a detailed and unbiased due diligence process, conducted by the company’s analysis team, which professionally reviews projects from financial, legal, technical, marketing and other perspectives.
Operational Risks
Operational risks are directly related to the company’s activities, when for some reasons the unlikely case of liquidation of the company would take place.
In the event of such an event, the company provides for certain operational and legal actions to preserve the investments of these customers.
Minimizing and Mitigating Investment Risk
Once investors understand different types of risks associated with their investments, they can use different portfolio management strategies to avoid or mitigate them. This process is best conducted independently or with the help of professional investment advisors.