We can guarantee that if you're at risk adverse and keep most of your money in a savings account, it’ll depreciate due to inflation. To reap the benefits of a lucrative financial strategy, you have to accept a degree of risk. Of course, we understand it’s a daunting prospect, but with sufficient knowledge, you can make informed investment decisions. Here are the four most common investments risks you should consider:
Inflation – the increased cost of services and goods – affects every aspect of daily life and increases annually between 3-4%. Before investing you need to know the inflation rate so you can strategize and calculate the real return on your investment.
For example, if inflation is 3% and your savings account only gives you 1% interest, that means you’re essentially losing 2% of your money every year. You also have to be open to the risk that inflation might increase beyond 3% (hyperinflation), but your family will still need to make ends meet with your current income. When budgeting your investments, it’s a good idea to leave leeway for inflation increases, so you don’t end up with less money than you anticipated.
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If your wealth creation plan relies solely on stocks, you know it's at the mercy of the overall economic condition of the country. It sounds dramatic but a market crash, such as the global meltdown in 2008, could decrease or crash your investment’s performance. Political, weather or other events can cause a fluctuation in investment value.
Investments also follow market trends. For example, in the case of real estate, if the majority of investors believe a property is overpriced, then your real estate can lose value even though the market structure stays the same. We’d recommend you do market research to recognize recurring patterns, as well as expanding your financial portfolio ensuring you invest in a variety of assets to safeguard your family’s financial stability.
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If you make long-term investments, you have to bear your mortality in mind. Investments like pensions and annuities only yield results after 10-20 years, and there is the possibility that you might not enjoy the benefits. On the other hand, you could exceed your life expectation and continue building your wealth well into your golden years.
Investing in real estate is a one way to combat mortality risk. It is a sure-fire way towards a balanced financial portfolio and sound wealth creation. A property is a tangible asset generating rental income and if not sold, continues to build your family’s wealth, regardless of mortality risk.
Default risk is more commonly known as credit risk and is associated with a borrower going into default i.e. not making payments as promised. If you’re financially savvy you probably never land up in debt or file for bankruptcy. However, if you’re investing in a company there’s a possibility it might go bankrupt, and you’ll lose all your hard-earned money. Even pensions are vulnerable to default risk.
A strategic wealth creation plan factors in risk and includes a diverse financial portfolio with a variety of assets. This is especially important if you have dependents. Now that you know a bit about investment risks, you should define your financial strategy and solidify your investment options.
If you want to make a sizable investment with maximum returns, we’d advise taking a look at our Calpe apartments for sale.