Investment Risk Types and Advices

Stock investing and risk go hand in hand. You cannot find one without the other. Additionally, we have control over certain types of risk, whereas others are beyond our control.

Thus, when you establish your investment portfolio it is extremely important to make a clear view of your risk tolerance level. After this you should select stocks and bonds that best meet your risk tolerance. In this way you have a certain level of control over the risk to which you are exposed.

On the other hand, there are risks you cannot foresee or control. As a result you can only respond to them, since they affect the economy and the market as a whole.

Four main types of risk can be outlined. They are as follows:

1. Economic Risk

   The economic risk includes the worsening in the conditions of the overall economy. Such a risk was experienced during the 9/11 terrorist attacks.

   For inexperienced investors this is the time to take a rest and don't undertake any actions. However, some financial experts advise the strengthening of the positions in good and solid companies.

   What's more, thanks to globalization, the negative effects of domestic economic uncertainty can be avoided. This can be done through the investment in foreign stocks.

   Most susceptible to economic downturns are people nearing their retirement. This is especially sharpened if the retiree is not able to shift his/her assets to bonds or fixed income securities.

2. Market Value Risk

   This type of risk is observed when the market turns against or ignores the investment you have made. This ignorance of your investment is caused by the chasing of the market of another investment that has been announced as the next hot deal.

   On the other hand, benefits can be extracted from this situation. For instance, since the market is after another investment, the prices of the other investments are lower. So, you can use this situation to add some more stocks to your holdings.

   However, you should not ignore the falling levels of your investment since this may cause you to lose money and more profitable opportunities.

   The key to counteracting this risk is to diversify among several sectors. In this way a fall in one sector will be compensated by a rise in another.

3. Inflation

   Inflation doesn't have mercy on anyone. The product of inflation is recession which has been preceded by eaten up value.

   Inflation is generally caused by the chasing of too much money after to few goods. High interest rates are viewed as a cure to inflation. However, they may have a negative effect as well.

   In order to save their money, many investors have preferred to invest in real estate or precious metals.

   The group of people that is most susceptible to the negative effects of inflation is those people who are on fixed income. To protect against inflation, stocks are recommended as an investment tool. This is so since companies can adjust the prices of stocks to the levels of inflation. 

Being careful of what risks you take is reasonable but the lack of whatsoever risk-taking may result in miserable profits. Remember that the higher the risk the higher the profits. There is not wrong in being careful in the investment of you money, but a too conservative approach may deprive you of high returns.

Now that you know about the major types of risk it is time to construct strategies for the counteraction of each of them, because no one is insured against them.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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