How well we know about investment risk

Article by: Nipapun Poonsateansup CFP®   Independent Finance Planner

"Investment is risky so investors should carefully study the information before making a decision to invest. "This is the final sentence that we always hear in the world of investment. That makes us realize that. Investment is risky but the compensation for the risk is an opportunity to get higher returns.

Most people know and are more familiar with the word 'return' than the word 'risk' because everyone decides into the world of investing because they expected to get higher returns there. But do not forget that risk is another coin of return. So in this article will explain what the risk of investment is and what is it consist of.

Investment risk is the chance that we will not get the returns as we expect from the investment. We can divide the risk into four categories.

  1. Business Risk : Risk from changes in company profitability and  as a result, investors can lose money or investment. It consists of financial risks, management risk and industrial risk.

  2. Market Risk:   Opportunity to lose investment due to changes in the price of investment securities. According to the demand and the supply of the market.

  3. Interest Rate Risk: Risk from changes in return on investment due to changes in market interest rates.

  4. Purchasing Power Risk :The risk of the purchasing power of money decreases. The major cause of inflation. Inflation is a condition where the value of the commodity is rising. It make  money that we have can buy less items.


Will see that whether we invest or not. We must meet the risk of buying power certainly. This means that the money we have is worth less and less. The way we can keep the power of money is to find a return that is at least equal to or greater than inflation. So we have to learn about investing and the risk of investment to find the right investment strategy for our investment goals.

As we get to know the different types of risks, we must be able to manage these risks at the right level. By diversifying into various asset classes because each type of investment risk is not the same. At some point, investment A may be profitable, but investment B has a loss. But overall, we may be profitable or not much loss.

Moreover, in the investment world., no asset that can beat the market forever. And no assets will ever lose. The diversification of investment is to reduce the volatility of investment. But in the long run, the return must be sufficient to achieve the investment goal. We can diversify investment risk as follows:

  1. The distribution of investment within the same investment asset: such as if the stock is to be distributed to many stocks or a single industry. If the profitability of the stock is changed. May cause us a loss.

  2. Diversification across asset types: It's the most well-known investment diversification. For the reason that "there are no assets to beat the market forever. And no assets will lose the market forever. "Asset investment such as gold, government bonds. real estate and deposits. We will diversify into these assets in different proportions depend on risk level that each person can take. If we can accept low risk, may invest in government bonds, deposits or real estate in higher proportion to stock and gold.

  3. Cross-border distribution: Sometimes foreign investment may give us a better return on investment than investing in a country. In some countries, there may be higher economic growth rates than Thailand. However, do not forget to consider the exchange rate risk, liquidity risk (Ease of access to money from investment countries) and country risk.

When decide to invest, investors should carefully review and adjust their investment in each asset. At least once a year, because the economic situation and market conditions are changing all the time. Investors should study more information before investing. Or find an investment advisor for investment advice that suits their investment goals and their acceptable level of risk.