The risks involved in being an investor

Published: 23/11/2018 | Last Updated: 06/04/2020

Investment is of course all about risk. In a sense there is no such thing as a safe investment: the only way to make money is to put an initial amount of money at risk. Indeed, although professionals don’t like to hear this, investing is basically gambling. The odds can be improved through knowledge, timing and skill, but there is always an element of risk involved.

Some investments are low risk, true, and are likely to turn a modest profit. In such cases, even if you occasionally suffer small losses, in the long run you’re almost certain to come out at least a little bit ahead of where you started. Investments with a higher risk level potentially stand to make greater profits, but come with an equivalent chance that you might lose some or all of your initial stake.

Can you avoid risk?

With a managed investment like a high interest bank account, you would be guaranteed a certain return over a fixed period, and have your initial investment protected. That is the only kind of investment that isn’t dangerous, because you’re effectively shielded from the risks being taken with your money.

In reality, the market is a risky place. If you’ve invested in shares, then the value of them will inevitably both rise and fall over time. Interest rate hikes can cause the value of bond investments to drop, and changes in the exchange rate can make your currency investments lose value.

Even the pound in your pocket can lose value, either compared to other currencies or against the value of the goods and services it can buy, i.e. through inflation. That means that even those of us who don’t think of ourselves as investors share in the risk. It’s not just investing, but money itself that is a risky business.

Investment scams

In the internet age, straight-up scammers have unfortunately proliferated. Be wary of any investment opportunity that sounds like it’s too good to be true, as it usually is. Fraudsters can sound alarmingly convincing and can be extremely difficult to spot. The website https://www.forexfraud.com/ gives invaluable advice on how to avoid forex and other investment scams. It also provides a basic guide about how to successfully and legitimately invest in the foreign exchange market, including impartial forex broker reviews so that you can choose one that’s right for you.

If you’re at all unsure, get any investment opportunity you’re offered in writing, and have a professional advisor look it over thoroughly before you commit. If you’re put under pressure to invest right away, or told that you may miss out if you delay, that is a sign that the person encouraging you to make the investment may be dishonest.

Even if the investment is referred to you by friends or trusted colleagues who seem to have already made a profit through it, this is no guarantee that it’s not a scam. Paying out handsome profits to initial investors (actually just taking money from one victim and giving it to another) in order to bait the trap is one of the oldest tricks in the book.

Standard precautions

A classic way to guard against risk is by diversifying your investments. A diverse and balanced portfolio is one that includes investments in a variety of stocks, bonds and currencies, in different business sectors and across different countries.

Any investor also runs the risk that the company or entity they’re invested in won’t be able to honour their investment when they try to cash it in. This is known as credit risk, and can be evaluated by looking at the body’s publicly available credit rating. Those forms of investment that essentially involve buying unsecured debts are the riskiest in this regard, such as those implicated in the sub-prime mortgage crisis in the US that contributed to the financial crash of 2008.

Following on from this, there is also a risk that the money you’ve invested may be reinvested without your knowledge in a riskier venture. There’s not a great deal that you can do about that apart from keeping a close eye on the activities of companies you have bought shares in.

It’s also important to make sure that not all of your money is tied up in investments that can’t be easily disposed of. This is known as having sufficient liquidity. Not only should you not have all of your eggs in one basket, you shouldn’t spend all of your money on eggs either.

Any potential investor needs to decide for themselves their own level of risk tolerance, and to accept the fact that they may make losses as well as profit. Be vigilant when it comes to scams, and only work with trusted, reputable brokers. Follow these rules and investing should serve you and your money well.