Risk

After diving deep into the many shades of risk, in this chapter, we’ll explore the various factors that influence investment risk and reveal what you need to know about each one.

So, grab your adventurer’s gear, and let’s set off on our quest to discover the factors that shape investment risk! 🙌🏼

The economic ecosystem

Our first destination on this adventure is the economic ecosystem, a vast and interconnected landscape that can have a significant impact on investment risk. Factors like GDP growth, employment rates, inflation, and monetary policy can all influence the performance of investments.

For instance, imagine you’ve invested in a company that produces luxury handbags. 👜 If the economy is booming and people have more disposable income, demand for luxury goods may rise, boosting the company’s profits and the value of your investment. Conversely, during a recession, consumers might cut back on non-essential purchases, increasing the risk that your investment could underperform.

Fun fact: Did you know that the United States experienced its longest period of economic expansion from June 2009 to February 2020? This 128-month streak was brought to an end by the COVID-19 pandemic. 🦠

The political plot

Next on our journey… politics, where changes in government policy, regulations, and geopolitical events can create waves that ripple through the investment world.

Suppose you’ve invested in a renewable ♻️ energy company that benefits from government subsidies. If a new administration comes into power and decides to cut these subsidies, your investment could be at risk. Staying informed about political developments and understanding how they might affect your investments is key to navigating the murky waters of the Political Plot.

A good example of the impact of political uncertainty on investments is the UK 2016 referendum. In June 2016, the UK voted to leave the European Union in a referendum known as Brexit. The ensuing political uncertainty led to increased volatility in the financial markets and affected numerous investments for year to come.

The sector saga

The performance of specific sectors and industries can also play a significant role in investment risk. Factors like technological advancements, consumer preferences, and industry regulations can influence the prospects of companies within a sector.

Imagine you’ve invested in a company that manufactures traditional petrol ⛽ and diesel cars. If electric vehicles become increasingly popular and governments introduce stricter emissions regulations, your investment could face increased risk. To navigate the Sector Saga, it’s essential to stay informed about industry trends and consider diversifying your investments across different sectors.

For example, the tech sector is known for its rapid pace of innovation and disruption, which has led to the rise and fall of many companies. In the early 2000s, Nokia was the world’s leading mobile phone manufacturer, but it struggled to compete with the rise of smartphones and eventually sold its phone business to Microsoft in 2013.

The company chronicles

Our final destination on this quest is the company chronicles, where the unique characteristics and performance of individual companies can influence investment risk. Factors like management quality, financial performance, competitive advantage, and corporate governance can all play a role in shaping the risk profile of an investment.

For example, let’s say you’ve invested in a company with a history of strong financial performance and a well-regarded management team. However, if the company becomes embroiled in a scandal that calls its corporate governance into question, the value of your investment could be at risk.

To navigate the company chronicles successfully, it’s crucial to conduct thorough research on the companies you invest in and keep a close eye on their performance and any potential red flags. 🔴

In 2001, Enron, a major energy company, filed for bankruptcy after revelations of widespread accounting fraud. The scandal led to significant losses for investors and highlighted the importance of scrutinising a company’s corporate governance and financial practices.

Summary

Our adventure through the world of factors influencing investment risk has come to an end, but the lessons learned along the way will serve you well as you continue to build your investing knowledge and experience. By understanding the various factors that shape investment risk, you’ll be better prepared to make informed decisions, manage potential risks, and ultimately, create a diversified portfolio that aligns with your unique goals and risk tolerance.

Next, how should you assess your own risk tolerance? Or, how hard can you get hit and keep moving forward? 🥊