Risk and returns are the cornerstones of every investment plan. Investors are always on the lookout for low-risk high-returns investment plans that keep their wealth secure and offer generous returns on them. However, the risk factor is inherently linked to investments, so you can’t evade all of it. But figuring out which risk is better to gamble on is where the investor’s acumen lies.
The volatility of stock prices is often considered a risk. This may or may not be accurate on all accounts. While volatility does increase the uncertainty of returns that you’re promised, it doesn’t necessarily make it a bad investment option. Risk doesn’t always translate into losses. If you expected an asset to accrue 10% profits and earned you 8%, the loss of 2% is a risk. It’s an underperformance, which is classified as a risk.
Let’s go deeper into the topic.
If an investment asset offers a low percentage or likelihood of underperformance, it’s considered low-risk. By investing in such an asset or investment plan, the stakes of winning are high. Low-risk investments protect you against financial losses that cause your wealth to depreciate.
However, defining investments as low-risk or high-risk is assigning value to investments in relative terms. It’s relative to how high your expectations are regarding the rewards. It’s also true that different assets offer a unique risk profile. Factors such as diversification of your investment portfolio, long-term and short-term financial goals, and time window each impact the risk profile. An investor investing in US Treasury bonds knows that there’s slim to no chance that they won’t receive their principal payments. This makes treasury bonds a low-risk investment. But that also limits the profit margins that they can earn on them. A profit-oriented investor might choose to invest in biotechnology stocks with high risk because they can make big gains over the years
Factors That Influence Risk
As mentioned, many factors shape the risk profile. The time horizon is one. Generally, the longer you can wait before seeking gains from an investment, the higher your reward will be. But this often comes in conflict with an investor’s personal short-term goals. They might need to liquidate their assets to fund a medical emergency, college tuition, or construction project.
Types of Risk
Here are some common types of risk:
- Market Risk: the market changes, and the asset depreciates. You need to look into bullish and bearish trends to ascertain the risk.
- Interest Rate Risk: interest rates apply to fixed-income investments that may increase or decrease the risk.
- Reinvestment Risk: this happens when the interest rate decreased as the investment is reinvested upon maturity.
- Political Risk: political changes in the government or policies can affect the value of your holdings.
- Legislative Risk: new legislation can affect the financial market and, thus, the value of investments.
All this talk of risk shouldn’t deter you from investments. Consult with our financial consultant for personalized financial planning services regarding savings and investments in Santiago. I, Steven J Gillespie, offer investment advice and wealth management to expats and foreign nationals. You’re not investing in my business; you’re securing your financial future by working with me! Reach out to me today.