Investment Risk Pyramid

After deciding on how much risk is acceptable in your portfolio by acknowledging your time horizon and bankroll, you can use the risk pyramid approach for balancing your assets.

• An investment pyramid actually represents three levels of investment. At the bottom of the investment pyramid, low risk investment options are placed. 

• In the middle portion of the pyramid, the investment options have a greater risk associated with them. However, these investment options can give you better financial returns than the extremely low risk ones. 

• The third and the topmost portion consists of extremely high risk investment options. Though the profit from such investments can be unbelievable, you also stand at a high risk of losing your money due to volatile market conditions and overall nature of the economy. 

Personalizing your Pyramid 

Define the overall parameters of the portfolio. Each investor is different and one investor may not tolerate the same risk as another investor. Those who want more risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting less risk can increase the size of the base.

You must understand your goals, priorities and financial aim in your life and then decide which investment would suit you. The pyramid representing your portfolio should be customized to your risk preference.

Investment Risks You Must Know (2)

6. Non Diversification Risk
Diversify your fields of investment. DO NOT put all eggs in one basket. Asset allocation and diversification can protect against non diversification risk because different portions of the market tend to under perform at different times.

7. Liquidity Risk
Liquidity Risk arises from difficulty of selling as asset. An insufficient of secondary market causes investment cannot be bought or sold quickly enough to prevent or minimize a loss when credit rating falls.
Some assets are highly liquid and have low liquidity risk (such as stock of a publicly traded company), while other assets are highly illiquid and have high liquidity risk (such as a house).

8. Gearing Risk
Gearing is borrowing to invest, or investing in leveraged assets such as installment warrants or options. Most businesses require long term debt in order to finance growth, however, the introduction of debt and gearing increases financial risk. the higher the level of gearing, the higher the level of financial risk due to the increased volatility of profits.

9. Legislative Risk
The risk that a new law or a change in an existing law by government could have a significant impact on an investment. It could significantly alter the business prospects and adversely affecting investment.
You should be aware when investing in foreign countries because countries that may often change policies and undergo political transformation are prone to legislative risk.

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1" Warren Buffett

Investment Risks You Must Know (1)

In the investment world, risk is inseparable from performance and, rather than being desirable or undesirable, is simply necessary.

1. Mismatch risk
Trade the wrong investment products which doesn't suit with investment budget. Or investing in something that is inappropriate for your investment needs

2. Inflation risk
The risk that the rate of inflation will exceeds the rate of return on an investment. For example, if the rate of inflation is 5% over a year and the rate of return is 3%, then the investor has effectively taken a loss even though investor has made a profit in absolute terms.

3. Interest rate risk
The change of interest rate may decrease the return of investment. This may happened when current interest rate is lower than the interest rate when you invest.

4. Market risk
The value of investments may increase or decrease over a given time period simply because of economic changes or other events that impact large portions of the market. It means that your return of investment can increase or decrease at such a time.

5. Market timing risk
Market timing risk is different from market risk. Market risk affected all investor however, market timing risk is the risk that an investor takes when trying to buy or sell a stock based on future price predictions.

"Risk comes from not knowing what you're doing." - Warren Buffett