Time to Invest? Don’t Get Stressed – Know the Risks
There are risks that apply to almost everything you can invest in. A lot of people understand the more basic market risks, such as equity risk – the risk that the value of the asset you’ve invested in plummets due to the laws of supply and demand turning against you -, but there are other types of risks you need to consider.
Investment is definitely something you should be doing if you have money that would otherwise just be lying around. But if you go into this without understanding the risk you could be placing yourself in, then you may be setting yourself up for some serious mistakes. And, in this game, that means an irrevocable loss of money. And, seeing as this is a financial blog, that’s definitely something we’d advise against!
Concentration is bad
No, that doesn’t mean that concentrating on this article is going to be bad for you. ‘Concentration’ here refers to the act of putting all your eggs in one basket. If you’ve invested all your money in real estate, instead of putting some in real estate and some in another type of asset, then what happens if the real estate market crashes? All your eggs get smashed. At least with eggs, you can try to make an omelette afterwards. But we’re talking about cash – and you can’t spend lost cash.
People often find themselves getting a bit confused about the art of investing, so they seek help. The problem is that not everyone out there who claims to want to help you make sound investments actually intends to do that! These people may defraud you. You also have to keep an eye out on the particular institution from whom you’re making the purchase itself. Let’s say you want to invest in gold. You need to research the seller in order to ensure you don’t end up with a fake. Verified businesses such as United States Gold Bureau are probably a good bet, but do make sure you do your own research.
Some assets have high liquidity. Stocks, for example, can be turned back into cash very quickly. This is good when we’re thinking about things in terms of liquidity risk. If something bad is on the horizon, you can liquidate a high-liquidity asset quickly, before too bad a hit in value takes place. Some assets have low liquidity, such as a house. There could be months between your decision to sell the house and the actual cash return – and who knows what could happen in that time?
The dreaded ‘I’ word
It’s the word that sends many modern economists and politicians running to hide under their beds: inflation. The truth is that the dangers of inflation are usually overstated – some think that anything above an inflation rate of 2% is a sign that the economy will collapse, which isn’t strictly true. What inflation does do, however, is eat away at your purchasing power. If the value of your asset doesn’t keep up with the rate of inflation, then you could end up losing a lot on your initial investment.