Those who decide to invest their money in some way must understand that speculation always carries a certain degree of risk. There is a risk that the capital will lose some of its value, due to economic circumstances or even unexpected market trends.
However, each type of investment involves a different degree of risk, more or less high, often directly related to the potential return of the investment itself.
The risk stems from several different factors, and some of these cannot be known at the outset; therefore, it is basically impossible to fully control the risk. However, it is important to think about it thoroughly before embarking on any kind of speculation.
Wealth management companies usually offer their clients questionnaires, which allow them to assess the risk threshold the individual is willing to take. Again, this is a fairly random element, but it can be correlated with certain indicators, e.g., with the goals for which a person decides to undertake an investment.
To give a practical example, whoever sets aside money for his or her child’s university can accept a certain risk, at least in the first 5-12 years of the child’s life; from the beginning of the speculation to the day the child goes to university, it will be possible to change the types of investment to be made, to reduce or increase the potential risk.
The financial market then offers many types of speculation, with the risk threshold varying considerably. For example, UK investment bonds offer a fairly low risk threshold, as they are guaranteed by the UK government.
Different Types Of Risk
The degree of risk of an investment depends on different but in some cases measurable, or at least assessable, factors. Therefore, we do not speak of a single type of risk, but of different types, the presence or absence of which depends on the type of speculation one decides to take part in.
The classic risk is the market risk, i.e., the risk associated with the possibility that the value of a given asset will fall over time.
There are, however, financial instruments that do not present this type of risk, as they are guaranteed or have a guaranteed return; in this case, however, it may happen that the capital may have to remain immobile for some time, sometimes even for decades.
We speak of liquidity risk in these cases: the investor who needs to spend his money will not be able to do so, because he is locked into an investment. In some cases, one also speaks of credit risk, when there is a possibility that at the investor’s request the institution that issued a financial instrument may not be able to return the capital, due to a financial crash or even just the economic situation.
How To Assess The Risk
In general, it is quite easy to assess the risks one faces when investing, because these are usually stated. Particularly when one turns to credit management companies, as in the purchase of mutual funds, it is possible to view benchmarks that cover all elements of speculation, including risk.
We are therefore talking about information that can be obtained, but only if one is aware of the issue and decides to inform oneself about it.
There are also various guides to help investors navigate the risk thresholds of the various investment proposals; seeking professional advice is quite useful in this respect: experts in the field can accurately read not only speculative proposals, but also the economic and political situation of the moment.
Moreover, many investors know that a speculation that proposes very high potential returns is likely to have an equally high-risk profile. However, there are no hard and fast rules, the best way to know the risk of an investment is to inform yourself carefully and, when in doubt, seek advice from a credit management company or an advisor.
Risk Is Never Zero
We have clarified what risk is in investments, it is evident that the risk is never zero, especially when considering all existing types of risk. Even for those speculations that are said to be risk free, there is still a threshold of liquidity risk, although credit or market risk is effectively zero.
Even investments such as deposit accounts, which provide a guaranteed annual return, have a certain risk threshold, which is directly related to the credit possibilities of the institution that manages them.
A bank that goes bankrupt will no longer be able to return to its customers the sums previously held in their deposit accounts. This is a rare and implausible event, but not impossible.