Understanding Risk

Types of risk in investments to be aware of.

Every day we are facing numerous risks and without knowing it, we are applying risk management techniques. In any given situation we are preparing ourselves for the risk so we can either avoid the risk altogether or we have a plan in the event that things go wrong.

Our portfolios are also facing numerous risks every day. Wealthy investors need to protect their private assets with an asset protection plan. As a savvy investor, our clients are fully equipped with a plan to combat the many kinds of risk out there. Goldbach Capital is prepared to create a plan with you.

A risk management strategy can be implemented in personal finances, managing a business, and family investing. By applying a risk management plan to a financial plan, investors protect their assets to the best of their ability.

The first step of any asset protection plan is understanding the kinds of risks that are present. Being knowledgeable of the risks one is facing allows them to equip themselves with a strategy to handle the situation if they encounter them.

In this article we have summarized some of the many categories of risk that can be present in a portfolio, depending on asset classes, socio political status, and other factors. To fully understand that risks your portfolio faces and how to manage your financial risk, contact Goldbach Capital today!

Systematic vs. Unsystematic Risk

Any investor is susceptible to systematic and unsystematic risks. A systematic risk is one that affects an entire market or market segment and make an impact on a large number of assets. Systematic risk is also known as market risk, undiversifiable risk, and volatility.

Other kinds of risk that fall under market risk include interest rate risk, inflation risk, currency risk, liquidity risk, and sociopolitical risk.

Unsystematic risk is a type of risk that only affects a small number of assets and is often called diversifiable risk, specific risk, or residual risk. This risk occurs in the uncertainty is a specific company or industry investment. Factors include a change in management, product recalls, or regulatory changes. Essentially, it is anything that will drive down a company’s sales or performance.

More specific types of risk include the following:
Credit Risk or Default Risk
Credit risk occurs when individuals who borrow money are unable to pay back the loan. These people go into default. Investors who are subject to credit risk can be hit by decreased income or a rise in costs for collection.
Government bonds often have the lowest default risk, especially those offered by a federal government, but also often offer the lowest returns. Corporate bonds are the opposite. They have high interest rates, which is great, but the default risk rises.

Asset Backed Risk
Investments face asset backed risk when securities backed by assets become volatile if the securities change in value.

Political Risk
This kind of risk is present when you are putting yourself in the hands of political change, natural calamities, diplomatic changes, or economic conflicts. This is also known as geopolitical risk and many investors consider this risk when they decide to make investments in offshore destinations.

Equity Risk
Equity risk is a type of market risk. It is defined by volatile price changes of shares of stock. The price of shares changes depending on supply and demand. When an investor loses due to the drop in the market price of a stock, they have been affected by equity risk.

Liquidity Risk
This risk occurs when products aren’t selling fast enough to cut losses. An investment in real estate often falls under this type of risk. Selling a property may not be as easy as planned when it is time to sell.

Foreign Exchange Risk
This is another kind of market risk. Also known as exchange rate risk, or currency risk, this type of risk also occurs when investing in foreign markets. When investing offshore, exchange rates may change the price of an asset. Foreign exchange risk applies to financial instruments that are in a currency that is not that of an investor’s home country. For example, if an American investor makes an investment in foreign stock, the share may appreciate in value but the investor can still lose money if the foreign currency depreciates in value compared to USD.

Inflation Risk
With this type of risk involves a loss in purchasing power due to the investment value not keeping up in inflation. This risk is typically attached to owning cash or debt investments like a bond.

Concentration Risk
When an investor only focuses putting money into one asset class, they are facing concentration risk. A diverse portfolio will spread risk over many different kinds of investments. One of the easiest ways to protect your assets and investments from risk is to diversify your income. There is always the possibility that one of your sources of income may take a drastic hit. If you make all over your family investments into one sector, you are opening yourself up to an array of events and certain markets may not be as strong as others.
Goldbach Capital
This is not every risk that investors face. If you want more information on what risks you are facing and how to protect yourself, contact our team today.
Unfortunately there is not one risk management plan that can protect everyone. It requires the watchful eye of a professional. Golbach Capital is equipped to prepare your you and your family with protection from cyber, fraud, and organizational risk. Our team has developed a strong expertise in risk management. All clients’ portfolios are managed according to predefined risk profiles, which are constantly monitored.
The procedures to ensure that portfolios are in conformity with the required risk profiles have been defined based on the most recent and accurate requirements of the Swiss and international financial authorities.
Furthermore, as a fully independent company, Goldbach Capital relies on a network of first-class custodian banks, which all maintain efficient in-house risk management and compliance departments.
These custodian banks are subject to a formal supervision by their local financial authorities. Goldbach Capital’s clients therefore benefit from complementary risk monitoring and compliance services, often in two different jurisdictions.

Want more information about this subject?

Contact us below: