Investing Risks

Investing does have the potential to help you save for retirement, but with all potential rewards come some potential risks. Below is a list of the common types of investment risk that you’ll run into, so it’s good to be aware of what you’re getting yourself into.

1. Liquidity risk
Liquidity refers to how easily you can turn your investments into cold hard cash to use. While stock investments are pretty easy to have exchanged, real estate investments take much longer. It’s important to know what options are available to you should a situation arise where you need money fast.

2. Credit risk
This risk focuses on how good a company or government’s credit is. Similar to our previous article on credit, we’re trying to assess how stable the company or government may be if we choose to invest. You would want to look for something with an AAA credit rating, which means they have the lowest risk.

3. Inflation risk
As stated before, we want to make sure our investments are increasing with inflation. While your money can grow, if it doesn’t grow at the same rate as inflation, you are losing purchasing power and the ability to buy the same things you once did in the past.

4. Concentration risk
While some types of investments may be very lucrative, would you be safe in the event of a worst-case scenario? It’s been said: Don’t put all your eggs in one basket. You want to ensure that your money is in a lot of different places; this way you have the peace of mind that comes with knowing that one bad circumstance won’t completely alter your life.

5. Horizon risk
This risk looks at your personal timeline: will the investment be safe (and have grown) by the time you want to take it out? What happens if you lose your job? Not being able to be prepared may force you to take the money out while the market is down, resulting in a loss of money.

6. Longevity risk
The risk of outliving your savings. This risk is particularly relevant for people who are retired, or are nearing retirement.
Even though risks are always involved in any type of investment, it’s important to know that “not investing at all” often is the greatest risk of all. An intelligent investor always navigates through the risks to find ways to have his/her money make money. That’s the ultimate goal of investing! For our next article, we’ll cover some of the ways you can minimize the effects of these risks; stay tuned!