Conservative investors are getting frustrated because in the last couple of years guaranteed assets have virtually yielded nothing due to the low-interest rates. Undoubtedly, rates will go up at some point but the guaranteed assets will not be able to overtake inflation. It is a tight spot for a majority of investors as they hope for a decent ROI but don’t desire to risk their capital loss.
‘The Private Investor’, a weekly magazine analysis of low-risk investment options based on the analysis of Prof. Dr. Max Otte. Stock investors can explore the option to improve their investment earnings without concerns about losing their money overnight.
Investment risk types
Investors categorize investment as 100% risky or 100% safe. It is a mistake because today multiple investment opportunities cannot be categorized in such a simple way. Investment risks are categorized under different types and levels.
- Market risk – In market risk, and asset [equities & fixed income investments] can lose their price in the market. In bull & bear situations market risk exists.
- Interest rate risk – Due to interest rate change an asset [fixed income investment] can lose its value.
- Re-investment risk – On maturity, the asset [fixed income investment] will get reinvested at a low-interest rate.
- Political risk – Some political scenario can lose value associated with foreign investment.
- Legislative risk – New legislation can cause the asset’s price or other advantages offered, to decline.
- Liquidity risk – When it is required, the investment [real-estate and fixed income] will not get easily liquidated or sold.
- Purchasing power risk – Due to inflation, the asset [fixed-income investment] can decrease its purchasing power.
- Tax risk – Taxation can increase the risk of an investment to reduce its return on capital.
Fixed income like CDs and bonds are subject to risks from reinvestment, interest rates, liquidity, and purchasing power. Stocks & equity-based investments are susceptible to market risk.
Annuities and municipal bonds are partially protected from taxation risk. No investment is secure from legislative or political risks. Thus, the risk level an asset reveals differs on its characteristics and type.