Investing requires taking risks.

Investing offers the best means to achieve your long-term financial goals. But any discussion of investing must begin with this simple truth:

Investing requires taking risks. Your investment success depends in part on your ability to control those risks without passing up reasonable returns.

Most investments don’t have a guaranteed rate of return. This is because when you are investing, you are taking on a certain level of risk. Each type of investment will have different types of risk.

Generally, the more risk you take, the more the potential reward will be. Alternatively, the lower the level of risk you take, the less the potential reward will be.

This can be referenced in the stock market with potential returns and in the bond market with interest rates. You’ll also need to consider that an entirely risky portfolio will take large dips with the stock market, which means potential losses. Also, if you choose to take very little risk, you could miss out on potential gains.

Investment risk is the uncertainty of if an investment’s realized or actual rate of return will equal its expected rate of return. The uncertainty is due to the many types of risk below.

Total risk is a combination of systematic and unsystematic risk. It is measured using the standard deviation of the ten risks discussed below. Typically, as more securities are added to the portfolio, the level of unsystematic risk decreases.

Market Risk, Nondiversifiable Risk

Systematic risk, or market risk, is integrated into the investment market. It cannot be eliminated through diversification, or the act of purposely varying the investments in your portfolio to reduce risk. This is where the risk of the overall security in the marketplace will get affected by changes in the economy.

Purchasing Power Risk (Inflation Risk)

Purchasing power risk, also known as inflation risk is the chance that inflation will decrease the real value of an investor’s assets. Fixed-income assets, like debt securities, are most affected by inflationary pressure.

This is because there is no guarantee that the cash flows won’t be affected by inflation, thereby reducing their future worth.

Reinvestment Rate Risk

This is a type of risk in which proceeds that are available for reinvestment have to be reinvested at a lower rate of return than the investment that generated the proceeds.?

Investments with a longer term to maturity and high interim cash flow have the highest reinvestment rate risk. Zero-coupon bonds and stocks that don't pay a dividend are not subjected to any reinvestment rate risk.

Interest Rate Risk

Interest rate risk is the chance that changes in interest rates would affect the value of the security. When interest rates rise, the value of bonds will fall, and will usually have negative effects on stocks.

Exchange Rate Risk (Currency Risk)

Exchange rate risk is the risk that a change in the value of the dollar and the value of the foreign currency during the period of the investment will affect the investor’s return negatively.

Exchange rate risk can affect investments in a foreign company or a domestic company that has supplies or customers in other countries.

Unsystematic Risk

Unsystematic risk is unique to a single security, business, industry, or country. This risk can be reduced by having a portfolio with as few as ten stocks. In other words, diversifying your investments can drastically reduce the chance of unsystematic risk. There are many different types of unsystematic risks.

Business Risk

The first type is business risk. It is considered to be the uncertainty of operating income. Utility companies have relatively steady and stable income streams and are considered to have a lower business risk. However, companies such as auto manufacturers have unsteady operating income levels and therefore have a greater business risk.

Financial Risk

The second type of risk is financial risk, which is the risk that a firm’s financial structure will negatively affect the value of the investment. Businesses, government entities, financial markets, and individuals can all be subjected to financial risk.

For instance, a company’s cash flow could not be enough to cover their liabilities or a government could default on its bonds.

Default Risk

Another type of unsystematic risk is default risk. Default risk is the risk that a borrower will be unable to satisfy its debt obligation. Bond-rating agencies rate bonds issued by corporations and municipalities for their likelihood of defaulting. Obligations of the U.S. government are considered default-risk free.

The greater the risk, the higher the interest rate. However, this risk does not apply to stocks, and bonds with more default risk usually have greater interest rate risk.

Political Risk

Additionally, political risk is another type of unsystematic risk. This is the risk that the politics or economy of a country can negatively affect investments. The United States is considered to have a low political risk, while foreign investments will have a higher political risk. Some examples of political risk include trade barriers, taxes, legislation, and administration.

Investment Manager Risk

Investment manager risk is the risk that is associated with the skills of the manager of an investment fund or account. It can refer to changes in the investment style or the change in the management team.

Essentially, all losses resulting from mistakes, negligence, and incompetence of the managers of a financial portfolio would fall under investment manager risk.

Liquidity Risk (Marketability Risk)

Liquidity risk reflects the ability to sell an investment quickly at a competitive price. Marketability risk is the ability to find a ready market where the investor can sell the investment.

Real estate is marketable, but not usually liquid. Alternatively, treasury bills are both liquid and marketable. Due to this, cash is the most liquid and marketable asset. If an investment is less liquid or less marketable it will exhibit more risk.

Tax Risk

The last type of risk is called a tax risk, which illustrates the chance that taxation of investment gains or losses can negatively affect the return of an investment. This could occur if a business does not accurately account for taxes. This would lower the amount of profits and returns to stakeholders.

You Must Understand Your Risk Tolerance

Overall, you must diversify your investments when possible to reduce your level of unsystematic risk. However, keep in mind that systematic risk is out of your control and dependent upon the economy.

When determining what you want to invest your hard-earned money in, consider what appropriate asset allocation is for your age, risk tolerance, and time horizon. If you do that, you’ll be well on your way to creating a strong financial future.

Investors looking to enter the crypto verse have a number of questions to address — whether to buy a lot of one currency, divide their money between two different crypto currencies, or participate in the movement of multiple currencies.

There is no one size fits all formula and deciding which crypto currencies to invest in varies depending on the risk appetite of one person versus another.

Specific crypto currencies are more suited to specific needs, such as for investors, application developers, day traders, and so on. Having a deeper understanding of currencies, would give you a better chance of making an informed decision.