We are fans of investing. And so might you, which is why you are here at Elfin. However, the biggest fear of many investors and perhaps yours as well: losing your deposit. Get it. Because with investing you especially don’t want to lose your money of course! But, is it realistic to lose your deposit you? How do your investments sometimes become worth less (temporarily)? What are the risks of investing? In this article, we’ll tell you how the following risks can play a major role in. The biggest risks in investing, they come. Read, learn, and invest!
What are the risks of investing?
Investing comes with risk, always. Point. Risks you can Never eliminate 100%, but minimize. With investing, you can take a lot of risk; you can also do it relatively safely. Investing is inherently more risky than saving, but if you do it smart then investing especially more lucrative than saving. Because, unfortunately, saving doesn’t give you much return, and the goal of investing is to make long-term returns so that you at least maintain your purchasing power. Risks associated with your investments depend on the choices you make around your investments. For example, it is important that you properly diversify the products you invest in, don’t let emotions and a sense of FOMO and Invest only with money you can spare. Before you start investing, it is important that you make a plan. Preferably a long-term plan which prevents you from storming that stock market like a cowboy and taking too much risk.
You have roughly 4 risks when you start investing.
- Market risk
- Specific risk
- Credit risk
- High cost
Market risk
When you invest in Exchange Traded Funds (ETFs), your investments follow the underlying index made up of hundreds of products, such as stocks or bonds. So with that, you follow the development of the underlying products, so to speak. These products, stocks, can rise in value and fall in value. That means you will also see the value of your investments go up and down. The risk that your investments will become worth less due to general economis
che situation investors also call market risk with a difficult term. This means that the entire market and almost all investments are falling in value.
Tip 1: Invest only with money you don’t need
If you don’t need your money, you don’t have to sell your investments either. And as long as you don’t sell your investments at a loss, they can increase in value again. This is important to think about: you don’t make a loss until you take your losses. Therefore, always keep the long term in mind and invest with money you can spare.
Tip 2: Spread your deposit
What can be good for your investments is not to put all your money in at once, but rather in smaller increments. Thus, you do not step in at one time, but at several: one time the price will be high, another time low. The future value of your investments is then less dependent on when they are deposited.
Spreading your investments is crucial, and here’s how to spread your investments.
Specific risk
Next, you have specific risk. This risk does not refer to the entire market, but rather to the risk that specific companies will run into trouble and their stocks and bonds will become worth less. For example, because the company makes something, which consumers no longer need or because a company does something that is not allowed and gets fined for it. So this risk can arise from anything, and all investments are affected by it.
Credit Risk
In addition, you also have credit risk. This is the risk that a company or country you invest in with bonds will (almost) go bankrupt and you will no longer receive credit (dividends or interest). If you invest in a company or country and they almost go bankrupt, they no longer pay you interest and your investments are worth virtually nothing. If they even go completely bankrupt, you also lose your deposit. ‘Tis very wise to limit this risk as well.
Tip 3: Don’t bet on one horse and spread your investments
Specific risk and credit risk are greatest when you buy only shares and/or bonds of one company. If you spread your investments across different companies in different sectors in different parts of the world, as you do with ETF investing, for example, you minimize this risk. If a company goes bankrupt, at the same time there are so many still standing that you probably barely notice it.
Excessive costs
If the percentage you pay in fees is higher than the expected return, there is a good chance that your investments are not earning you anything, but rather costing you money. Costs can add up quite a bit, especially for investors who actively follow the news and try to capitalize on price movements precisely in time. They buy and sell much more than an investor who does not try to predict the market. And transactions cost money. It is actually good for the return on your investments if your costs are as low as possible. Excessive fees can also occur when you invest too little money. The fixed costs of investing can then be quite high in percentage terms.
Tip 4: Hold on to your investments
You can cut costs by not constantly buying and selling investments. If you make regular deposits and hold your investments, you pay less transaction fees than if you actively trade in the stock market every day. In general, active investors know no better than other investors what the future looks like. After all, no one has a crystal ball. So always keep the long term in mind and hold your investments.
Conclusion
What are the risks of investing? Investing has risks, that much is clear. However, you can minimize the greatest risks in investing if you deliberate your investment strategy for yourself, keep costs low, spread your investments well and maintain a long-term horizon.
