How To Minimize The Risk Of An Investment?
Minimize The Risk Of An Investment : For capital management, one of the key elements for investors is the evaluation and management of the risks to which savings are exposed. As investors, we need to be aware that every investment carries a risk, defined as the possibility of obtaining losses on the initial investment.
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Risks Faced By Investments
However, in the financial markets, different types of financial risks can be differentiated when evaluating an investment. These can be, among others, the following:
- Market Risk means that which is derived from variations in the financial markets, among which the following are distinguished:
- Market risk for investment in variable income: is derived from changes in the price of variable income assets. This market is characterized by high volatility, thus causing the volatility of the price of such assets.
- Interest rate risk: this is the risk that arises as a result of changes in interest rates.
- Currency risk: as a result of investing in assets denominated in currencies other than the reference currency.
- Credit risk is that which occurs when the issuer cannot make the payment of principal and interest.
- Liquidity Risk: investments in assets with low capitalization and/or limited contract size can generate situations of low liquidity, negatively influencing the price conditions when it is decided to recover the investment.
- Operational Risk is the possibility of losses resulting from errors or failures in the processes themselves or any of their elements (personnel, internal systems, technologies…).
After having analyzed the various financial risks that could arise and that we will have to face, it is when we will consider how we can reduce the risk of our investment. For this task, the first important point is to know the risk profile of the investment.
The Risk Profile Of Financial Investments
A priori, the objective of any investor is to obtain the maximum return possible with the amount invested, but it is necessary to evaluate the volatility to which our assets are exposed and assume it is the same amount as the expected return.
In this way it is possible to define the investor profile before making an operation, thus allowing better financial advice and personalization of products and investment options according to your profile.
Therefore, the risk profile could be defined as the relationship between the risks that one is willing to assume and the returns that are expected.
What Is My Risk Profile As A Financial Investor?
One of the most important parts of financial advice is the determination of an investor profile, including, as we mentioned before, our expected returns and the risk to which we are willing to subject our savings. This task is carried out through the analysis of the answers to the following questions:
- From what situation do I start?: Through this question, it is about knowing and determining the current financial situation taking into account all those elements that make it up (income, expenses, debts…).
- What are my financial objectives ?: It is essential to establish financial objectives from a specific point and according to the economy.
- Do I need financial advice ?: market operations and financial products are increasingly complex elements and require constant monitoring and attention by professionals, therefore it is essential to go to them when making an investment decision.
Those riskier profiles are characterized by a solvent and stable financial situation, with an extended investment term over time and with a high tolerance for risk or volatility.
How To Minimize The Risk Of My Investments?
When determining the risk profile of the investor, the following question arises: how can I reduce the risk of my investments?
Once the specific risk profile has been determined, it is important to analyze a series of ideas and instruments that cannot help reduce the risk of exposure.
For this reason, it is a fundamental factor that the investment portfolio is diversified, both in terms of assets (fixed income, variable income, monetary, etc…) and currencies, as well as by geographical distribution. Throughout the procedure, one of the relevant factors is the study of the correlation between the assets, understanding this as the degree of relationship that exists between them, which is nothing more than the degree of relationship that exists between them. For good diversification, it is key to create an investment portfolio with assets with low correlation with each other, so that the gains of some assets offset the falls of others. Therefore, the lower the degree of correlation, the higher the projection regarding the circumstances of the financial market..
Why Is It Important To Invest With A Financial Advisor?
In the current circumstances of the financial markets and with continuous changes, the figure of a financial advisor is fundamental since, for a Spanish saver, bank deposits have been the main way of investing in savings. In the current situation with low-interest rates, savers look for other ways that provide them with greater profitability. This is where the figure of the financial advisor comes into play, who will dedicate the time that clients cannot count on on a day-to-day basis, as well as the organization, monitoring, and management of savings.by searching for alternatives that yield better returns.
Investments require emotional stability and we must avoid short-term tensions that can expose clients to high volatility.
It is essential to bear in mind that each investor is different, as shown by their different needs and objectives, therefore not all products are adapted to all clients or help to meet all financial objectives. For this reason, it is necessary to carry out financial planning exercises that, in the hands of a professional financial advisor, evaluate our objectives and determine the risk profile to which we are willing to submit our assets, which helps us understand the current situation and the impact that this can have on our investments.
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