Investment risk: How to understand and manage it?

Investing brings opportunities to grow your capital, but it also carries various investment risks. How do you tell which investments are riskier and which, on the other hand, are more conservative? How do you correctly manage the riskiness of an investment so as to minimise possible losses while preserving the potential for profit? Let's explain in detail what investment risk means, what factors influence it, and how it can be worked with effectively.

What does investment risk mean and why is it important to understand it?

Investment risk expresses the probability that the return on an investment will be different from what the investor expected. This difference can mean both a higher profit and a loss of the capital invested.

After all, no investment is one hundred percent risk-free, and so it is necessary to understand its riskiness and the possible scenarios for how it might develop.

An important point tied to this is that risk ≠ evil. The goal is therefore not to eliminate risk, only to approach it sensibly.

An integral part of the investment triangle

Investment risks are moreover tied to two other factors – return and liquidity. Together they form the so-called magic investment triangle, which shows the relationship between these three aspects.

If, for example, you are looking for an investment with a high return, you must be prepared for a higher degree of risk and often also lower liquidity. Conversely, if you want to have your money easily accessible and safely stored, the return will usually be lower.

When setting up an investment strategy, it is therefore important to determine what degree of risk you are willing to take on. Conservative investors usually choose less risky investments, for example savings accounts or government bonds.

Conversely, dynamic investors don't mind higher market volatility. They are thus able to keep their emotions in check when an investment drops more significantly in the short term. They can invest in stocks, cryptocurrencies, or startups, which, while offering a higher potential return, also carry a greater probability of loss.

Types of investment risks

Every investment faces various types of risk.

• Market risk is one of the most common and refers to fluctuations in asset prices as a result of economic or political events. If, for example, the stock market falls due to a recession, the value of your investments decreases.
• Another factor is credit risk, which concerns bonds and loans. If a bond issuer is unable to repay its obligation, the investor loses part of their investment.
• An investment can likewise be affected by liquidity risk, that is, the difficulty of quickly selling an asset without a loss of value. This often concerns investment properties, which, while they may have a high value, may not achieve the desired price if the investor needs to sell them within a short time frame.
• Another factor is inflation risk, which reduces the real value of the money invested. If inflation rises faster than the return on the investment, the real purchasing power of the money decreases.
• Interest rate risk, in turn, affects the value of bonds depending on changes in interest rates. If rates rise, the value of older bonds with a lower interest rate usually falls.
• If you invest in assets in a foreign currency, you must also reckon with currency risk. If, for example, you invest in euros and the koruna strengthens, the value of your investment when converted into Czech korunas decreases.

In addition to these economic factors, there is also operational risk, which is connected with errors in company processes or cyberattacks, and innovation risk, which concerns the introduction of new technologies and products.

Which investments are considered risky?

Every investment has a different level of risk.

Risky investments include, above all, stocks, cryptocurrencies, and startups. Stocks and cryptocurrencies are often highly volatile, which means that their value can rise quickly but also fall sharply. Investments in startups can bring an enormous profit, but at the same time there is a high probability that the given project will not succeed.

Medium-risk investments include, for example, mutual funds, ETFs, or corporate bonds. These investments offer a more balanced ratio between risk and return.

The least risky investments are considered to be government bonds, savings accounts, or investments in real estate, which grow capital over the long term.

You can read more details in the article How and what to best invest your money in.

How to measure and assess the riskiness of an investment?

Risk analysis includes the process of identifying, assessing, and managing investment risks. For investors, it is important not only to understand these metrics but also to monitor them regularly and adapt their strategy to the current market situation.

One of the basic indicators is return on investment (ROI), which shows how effectively an investment generates a return.

Another important factor is volatility and standard deviation, which measure the fluctuation in the value of an investment.

Independent agencies also provide an investment rating, which assesses the credit risk of bonds and companies.

Strategies for managing and minimising risks, in points:

• Portfolio diversification – Combining different types of investments.
• Regular investing – Smooths out market fluctuations.
• Setting an investment horizon – The longer the horizon, the smaller the risk of short-term fluctuations.
• Assessing your own risk tolerance – How much risk are you willing to take on?

How does InvestBay help minimise investment risks?

At InvestBay we offer a number of tools that help investors manage risks:

• We select only vetted properties in attractive locations.
• Reading tip: Andrew Thompson: After 27 years in real estate, I know how to minimise risks for investors
• We ensure transparency of returns through the online investment calculator.

Another advantage of InvestBay is the low entry capital – you can invest from as little as CZK 2,500, which enables easy portfolio diversification.

As an investor, you also don't have to deal with property management, because we take care of that. Thanks to these measures, InvestBay offers stable and safe investment opportunities with minimised risk.

Take a look at our investment offering and choose the property (or properties) you like. If you are interested in the details of how we operate, read a detailed description of our process here: How it works

A smart investment means understanding risk

No investment is entirely without risk, but if you are well aware of it and work with it, you can significantly increase your chances of success. The key is education, diversification, and realistic setting of investment goals.

Do you want to invest smartly and safely? Register on InvestBay and discover new investment opportunities in real estate.

It can be your great way to start investing.