You must know these investment risks. It’s no secret that money is the fuel that keeps the world running. That’s why everyone wants more of it.

There are plenty of methods for growing your money, some of them riskier than others. In fact, for every solid investment opportunity, there are tons of bad ideas that will take your money so fast it will make your head spin.

This article takes a look at some common investment risks that you should be aware of. Why? Because they can quickly cost you a fortune if you’re not careful. Keep reading to get the inside scoop.

Related Read: Investment Plan for Buying Stocks

Common Investment Risks You Should Avoid

1. Purchasing Power Risk

Also known as “inflation risk” this type of investment risk deals with the chances that inflation will decrease the value of your assets. This is a major risk due to the fact that there’s no guarantee that inflation won’t affect cash flows, thereby negatively impacting their future worth.

Purchasing power risk falls under the category of systematic risk. Systematic risk can also be referred to as market risk or non-diversifiable risk. In other words, this type of risk cannot be eliminated through diversification, thus you could take a big hit when there are significant changes in the economy.

2. Reinvestment Rate Risk

This is a high-risk investment option that occurs when an investor chooses to reinvest the money at a lower rate of return than was originally used to generate the proceeds that are now being reinvested. 

This might sound confusing, but it’s important to remember that investments that involve a longer term to maturity along with higher interim cash flow provide the highest reinvestment rate risk. Keep in mind that zero-coupon bonds and stocks don’t pay a dividend, thus they are not subject to any form of reinvestment rate risk. 

3. Business Risk

This type of risk falls under what’s known as unsystematic risk (non-market risk, diversifiable risk).

Business risk is essentially considered to refer to the uncertainty of adequate operating income. Because while some types of businesses such as utility companies have steady income streams, other types of businesses that don’t share the same stable income levels are therefore considered to have a greater business risk.

Be sure to check out this high yield investment opportunity.

4. Investment Manager Risk

Investing your wealth through an investment manager is inherently risky. Why? Well, because you are relying on the skills and wisdom of someone else. This means that you place yourself largely at the mercy of their ability to understand the market and to make decisions that are in your best interest.

The key is to interview a wide range of investment firms in order to judge which team will be the best fit for your investment goals. 

5. Default Investment Risk

This is a type of investment risk where there is a potential for a borrower to be unable to satisfy a given debt obligation. In these types of situations, the investor is generally offered a much higher interest rate on their money in exchange for taking on the higher risk.

Related Read: What are Investment Mandates and Why Do You Need them?

Conclusion

Building wealth is an important part of planning for retirement. Fortunately, this guide to common investment risks will help you avoid many of the pitfalls of various investment opportunities. 

Keep scrolling to discover more great investment tips and advice on this blog.