There’s No Such Thing as a “Risk Free” Investment

Daniel Penzing
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Credit Risk

The risk that the borrower will not give back the loan is called credit risk. Credit risk is managed by minimizing the probability of default and the amount of loss from default. A standardized measure of credit risk is the Value at Risk (VaR), which is the expected loss from defaults. Credit risk is mostly relevant to the counterparty risk.

Market Risk

There are a few different types of risk that a security trader must consider in the face of resisting the options of an investment. Markets are constantly changing, and although you’re buying an asset that has shown consistent value, there are no guarantees that it will continue to do so. This means keeping an eye on market shifts and making adjustments as necessary. Don’t be afraid to pull your punches or to pull out a piece of your investment at the hint of a downturn. That’s not a sign of weakness. It’s a sign of common sense.

Time Risk

There is also a degree of time risk associated with any kind of securities trade. While many assets are quite stable as time goes on, many others are not. Bonds can lose a degree of value based on changes in interest rate. Oil wells can lose a significant amount of their value if technologies change and start producing oil faster. Sometimes it’s not even a factor of the supply and demand. If the CEO of the company is replaced, the company’s stock price can drop significantly. If you’re unwilling to pay more than the market will offer, you may find that the investment doesn’t pay out like you’d originally hoped.

Liquidity Risk

There is no such thing as a risk free investment. The market inherently has risk. Anyone who says otherwise is trying to lure you into a scam. In a high risk investment, you are hoping for massive returns but you also run the risk of losing the money you invest. This can happen if the company that you are investing in goes out of business or is unable to pay back the money that you invested.

In the case of bond funds, the risk is quite low. You would hope for a small return with no significant risk of loss. If you buy an individual bond, you are risking your money without the potential of high returns. Since you are buying a bond, you are not actually purchasing ownership of the company. Your goal is to make a small return and avoid the risk of loss. Buying a bond is thus a low risk investment.

Narrowing down your investment options is quite easy once you have a good grasp of the difference between high risk vs. low risk. A high risk investment is the type that you take when you are trying to make a lot of money quickly. These are for those who are looking to get rich quickly. A low risk investment is what you take when you are trying to make a small amount of money without risking losing your money.

Operational Risk

Like most businesses, hedge funds also run the risk of failure. When optimism turns to pessimism very quickly, investors may pull their money just as fast. Black Monday of 1987 is a classic example of this, when investors lost large sums of money in a very short time.

Like many industries, hedge fund managers must ensure that they are following all relevant laws and do not go against the rulings from the SEC, the Financial Industry Regulatory Authority, or other agencies. A single mistake can result in an investor lawsuit.

Credit Risk

For hedge funds to take successful risks, they must have ready access to a range of credit sources that match their strategies. This may turn out to be a problem for America’s smaller funds, particularly for firms that are not rated or that have only a limited amount of capital.They may have difficulty borrowing against their current position as a hedge against possible market downturns.

Information Risk

For a hedge fund, information risk is tied to how they manage and share their knowledge. While proprietary information may help with strategy development, sharing strategy details and investment details too early will likely hurt them in the long run. This is because it may compromise the success of their strategy and the surprising factor that makes it so successful (at least for a while).

Inflation Risk

In “Risk-Free” U.S. Savings Bonds

When investors look for a safe place to deposit their money, they often turn to the U.S. federal government.

After all, the government has never defaulted on its bonds.

So, when you invest in U.S. Treasury bonds, you know that your principal investment – although not earning interest — is safely guaranteed by the U.S. government.

As with all investments, however, there are some risks. While inflation is not one of them, there is another risk to consider.

This risk has to do with how inflation affects the U.S. savings bond investment.

Specifically, first-time savers who purchase paper savings bonds face a very real possibility of receiving back less than they invested.

That’s because inflation can cause the value of the inflation-adjusted principal amount to drop.

Opportunity Risk

Anyone looking for risk-free investments is setting themselves up for mediocrity. There’s no such thing as a risk free investment, that’s why they are called ìrisky‬. Let’s be clear about this so we can understand the concept.

No investment can guarantee you a return. We all have a level of risk associated with every one.

If you are looking for a guarantee that you won’t lose any money on your investment, we can’t give that to you. Instead, we will guarantee that you won’t lose money by following the principles Michael laid out in this course?

So what you’re really looking for are investments that have the potential to generate the highest returns for the lowest risk.

We all need to invest because we all need to grow our assets. The question is how do we invest smartly and reduce our risks.