We already know that investing is a great way to secure your financial future and grow your long-term wealth. And thanks to PiggyVest’s Investify, you can start investing today with as little as ₦5,000 using only your smartphone! But do you know about the risks of investing?
The types of risk in investing include business risk, concentration risk and credit risk. However, you can also encounter liquidity, foreign investment, horizon and inflationary risks during your journey to financial freedom.
In this article, explore 11 of the most common types of investment risks you can encounter in Nigeria — whether you’re a newbie or a veteran. But before we list them, let’s start with the basics. What exactly is risk in investing?
What is risk in investing?
Investing inherently involves a level of uncertainty, and this uncertainty is what we refer to as risk. To simplify, risk in investing is the possibility of experiencing a loss or a return on investment that is lower than expected. Different types of investments carry varying degrees of risk — influenced by factors like market conditions, economic cycles and investor behaviour (yours and other investors in the market).
Investing, for the uninitiated, is entrusting your money in the hands of an individual or an organisation who will use that money to conduct business transactions and share in the profit or less from that transaction with you.
It can be as simple as loaning a family member a sum of money to start a business with the assurance that they will return your money back to you, or buying shares in a company with the assurance that if they make a profit, you will take a share some of that profit in the form of dividends.
The “risk” in investing — whatever form that might take — is that you are not directly involved in how the business is run. You have to trust that the person or organisation who is running the business where you have put your money take into consideration all the variables that might affect the success of the business, and make the right decisions.
Still, understanding risk is crucial for investors looking to optimise their portfolios.
By recognising the factors that contribute to risk, you can make informed decisions about where to allocate your funds, which ultimately helps you achieve your financial goals. The key lies in striking a balance between risk and reward to create a robust investment strategy.
How can risk impact your investment decisions and outcomes?
The impact of risk on investment decisions is profound. When investors consider the potential for loss, they often assess their risk tolerance — a personal threshold for how much risk they are willing to accept.
A higher risk tolerance may lead you to pursue aggressive strategies with potentially high rewards (like investing all of your money in cryptocurrency), while a lower risk tolerance might drive you towards safer, more conservative investments (like investing in opportunities on Investify).
The level of risk can also affect your psychological well-being. High risks can lead to anxiety about investment performance, which may result in rash decisions such as selling assets at an inopportune time (say, at a loss because you fear you’ll lose your capital).
Therefore, knowing and understanding risk not only helps in making more accurate predictions about potential returns but also contributes to more stable decision-making processes.
What are the types of investment risk?
Investment risk can be categorised into various types — each representing different aspects of uncertainty associated with financial markets. This section contains a comprehensive outline of the most prevalent types of investment risks that every investor should be aware of.
The following are 11 of the most common types of risk in investing:
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- Business risk
- Concentration risk
- Credit risk
- Foreign investment risk
- Horizon risk
- Inflationary risk
- Legal and regulatory risk
- Liquidity risk
- Longevity risk
- Market risk
- Opportunity risk
Let’s explore them!
1. Business risk
Business risk is the possibility that a company will fail to meet its financial expectations due to internal factors (like operational inefficiencies, management issues or market competition). This type of risk is particularly significant if you invest in individual stocks, as the fate of your investment is directly tied to the company’s performance.
You can mitigate business risk by diversifying your portfolio (avoid concentrating too much of your money in a single company or sector). Due diligence before investing can also help since it allows you to determine a stock’s track record to predict future performance.
2. Concentration risk
Concentration risk occurs when an investor has a significant portion of their investments in a single asset or group of assets. While this could lead to high rewards if the chosen investment performs well, it also increases the likelihood of substantial losses.
For example, an investor heavily invested in a particular technology stock might experience significant gains during a market upswing — maybe enough to be set for life. But should that sector face a downturn due to regulatory changes or technological obsolescence, the financial repercussions could be devastating.
This phenomenon is particularly evident in the case of market bubbles (where a surge in asset prices can lead to a false sense of security — like what happened during the crypto bubble of 2021).
However, you can mitigate concentration risk by spreading your investments across various asset classes or sectors.
3. Credit risk
Credit risk deals with the possibility that a borrower will fail to meet their obligations in accordance with the agreed terms. This is especially pertinent for fixed-income securities (such as bonds) where an issuer’s creditworthiness is key.
Therefore, you must assess the credit ratings assigned by agencies like the Securities and Exchanges Commission, Nigeria (SEC) to understand the risks associated with specific bonds or loans.
4. Foreign investment risk
Foreign investment (or FX) risk arises when you invest in markets outside your country. Factors like exchange rate fluctuations, geopolitical instability, and varying economic conditions can significantly affect returns on foreign investments.
Therefore, you should be prepared for the additional complexities that come with investing internationally.
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5. Horizon risk
Horizon risk is related to the impact of time on your investment decisions. It refers to the uncertainty surrounding the lifespan of an investment relative to your needs. For instance, someone who chooses to invest their retirement fund over the course of 30 years instead of saving it in a bank for the same period will have a different risk profile compared to someone who needs to liquidate their assets in a year.
Understanding horizon risk can help you select appropriate investment strategies.
6. Inflationary risk
Inflationary risk is the danger that rising prices will erode an investment’s purchasing power over time. If an investment’s return does not outpace inflation, your actual gain decreases in real terms. This risk particularly affects fixed-income investments and savings accounts, where returns are often lower than the rate of inflation.
You can mitigate inflationary risk by investing in FX vehicles like PiggyVest’s Flex Dollar opportunity which offers USD returns of up to 7% per annum.
7. Legal and regulatory risk
Legal and regulatory risk stems from changes in laws or regulations that might adversely affect an investment. This type of risk is more prevalent in industries with heavy regulations, such as banking, healthcare and crypto.
You need to stay informed about legislative changes that could impact your holdings if you invest in these sectors or similar industries.
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8. Liquidity risk
Liquidity risk refers to the risk of not being able to sell an investment quickly enough without significantly affecting its price. In markets with infrequent transactions, or within more obscure assets, liquidity risk can be a significant concern.
We recommend considering the liquidity of your investments to ensure you can access their funds when needed — regardless of how “safe” or profitable a venture might seem.
9. Longevity risk
Longevity risk is the risk that an individual will outlive their savings. This type of risk is particularly important for retirees who rely on their investments to fund their living costs for many years.
Effective retirement planning that includes diverse income-generating assets can help mitigate longevity risk.
10. Market risk
Market risk is the potential for an investor to experience losses due to factors that affect the entire financial market. This risk stems from fluctuations in asset prices driven by macroeconomic trends, political events, or global crises.
An excellent example is the Great Financial Crisis of 2008 which affected every market in the world — from the United States to Nigeria.
Diversification is one of the best strategies for managing market risk.
11. Opportunity risk
Opportunity risk (also known as opportunity cost) is the potential loss of an alternative investment when choosing one investment over another. For example, you incur opportunity risk if you decide to put your funds in a lower-return investment rather than a higher-return opportunity.
Being aware of this risk can help you evaluate your asset allocation strategy during diversification.
How to identify risk in investing
There are even more risks in investing than the eleven we highlighted above. Learning how to identify them can be a gamechanger for investors like you.
Here are some strategies for identifying the type and level of risk in your investments:
- Perform thorough due diligence. Research the financial health, management and market position of potential investments.
- Use various analytical tools. You can apply fundamental analysis and other risk assessment matrices to help clarify the risk profile of investments.
- Stay informed. Learn about current market trends, economic indicators and geopolitical events.
- Regularly review your investment portfolio. Reassessing risk tolerance in light of changing circumstances is equally important for maintaining a balanced investment strategy.
Good luck!
Summary
Understanding the types of risk in investing is essential for building a balanced portfolio. From business and market risks to liquidity and inflationary risks, each type contributes uniquely to the overall risk landscape. By educating yourself about them, you can make informed decisions that align with your financial goals and risk tolerance.
Want to give investing a try? Then, check out Investify on PiggyVest! We offer several low-risk opportunities with returns of up to 35% per annum. That means you can enter your Investor era today with as little as ₦5,000.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
