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A quick primer on investment risk

12 Dec, 2018 | Financial wellness

If you read our article covering Qapital Invest, you may have seen us mention risk a couple of times. In fact, we ask you several questions to assess your risk tolerance before recommending a portfolio based on your responses and when you’d like to reach your Goal.

So you may be wondering – what is risk and why does it matter for my investments?

To help you understand what risk is when it comes to investing, we put together this quick primer.

When it comes to investments, risk refers to the chance that the return on an investment will differ from expectations. There is always a chance that your investment will lose some or all of its value. Low risk investments are less likely to lose money, but offer lower potential return. High risk investments are just that they have a higher chance of not delivering the value you expect, but the potential value of that return is higher. Your risk tolerance is the degree of uncertainty you are willing to take on with your investments.

So how does that relate to your Qapital Invest account? Each of our five portfolios has a different risk profile — ranging from very conservative to very aggressive — based on its unique mix of stocks and bonds.

Overall, bonds are seen as less risky than stocks. That’s because if a company goes out of business, for example, they have to pay off their debts (bonds) before they have to pay any of their stock investors.

That said, there is plenty of variation in how risky an individual stock or bond is. As a general rule of thumb, whether considering government or corporate-issued bonds, the smaller or newer the company or economy, the higher the risk.

To put this in context, small companies or economies are perceived to have higher risk because they don’t have a history of growth, or may have a more limited infrastructure. Similarly, bonds issued from governments with thriving and relatively stable economies, like the United States, are often considered less risky than bonds issued by developing economies.

It’s the same with stocks. Newer companies with less history of growth are perceived to be riskier than well-established companies. However, the potential return may be higher because they may have more room to grow.

How Qapital Invest minimizes your risk

And if this all sounds too complicated, don’t worry. At Qapital, we will do our best to recommend the right investments for you based on your Goals and your risk tolerance.

Risk applies differently to many available types of stocks, bonds and other investment opportunities. You can invest in huge companies like Microsoft, small companies like SolarWinds Inc., companies based in the United States, or companies around the world. You can choose to invest in specific industries, like energy or finance, and they all have a level of risk associated with them (how risky they are may also be a point of contention). The point is, you have a lot of options when it comes to investing!

In order to minimize the overall risk our members are exposed to, we don’t invest in individual stocks and instead opt for a diversified approach for our portfolio recommendations. All of the stocks we invest in are part of ETFs, exchange-traded funds, that sample a segment of the stock market (we’ll cover this in more detail in another article). Simply put, investing in ETFs allows you to own a little bit of a lot of companies so you don’t experience all of the downside if a single stock drops suddenly.

Summing it up

If this seems overwhelming, we understand. We’re here to help make this whole investing thing a lot less complicated. That’s why, after asking you a few questions, we do our best to recommend the right investments for you based on what you want to achieve in your life.

Ready to start investing? Download Qapital today
and open your first Invest Goal!

Josue Ledesma