Portfolio diversification is a basic tenant of any good risk management strategy. However, there are some risks that portfolio diversification can not improve on. It’s important to be aware of the limitations of portfolio diversification and the risks that a portfolio will face no matter how well diversified it is. This article will dig into the types of risk that can’t be reduced by portfolio diversification.
If there is one takeaway from our blogs, it’s that there is no such thing as risk-free investments. You measure your risk tolerance by understanding your financial goals and what type of return you are seeking. The general rule of thumb here is that the higher the risk, the higher the potential rate of return.
We can define risk as potential uncertainty and/or financial loss when it comes to investment decisions or activities. Evaluating risk in real estate can be complex and investors must consider many unknowns which could potentially lower returns and value. A common risk that comes with real estate ownership is operational risk.
The goal of a portfolio is to generate positive returns and conserve capital. However, there are always competing forces at play. Trying to achieve high returns comes with the caveat that you must take on higher risk. Some investors aren’t willing to do that. So investor risk profiles come into play.
Excessive risk is equated with excessive returns. But not everyone has an interest in high-risk, high-return portfolios. For investors who want to manage risk in their portfolio, are bonds the answer? A financial advisor will likely say yes, but why? Let’s dig into the details.
Above-average returns always come with above-average risks. A thorough analysis can reveal the different types of risk that an investment may hold. Knowing the risks within an investment can help investors to manage those risks better.
Leverage allows investors to increase their exposure to a market, whether real estate, stocks, or commodities. If managed well, leverage can work in an investor’s favor. But some investors take on too much leverage. When the market goes against them, it amplifies the negative impact. In some extreme cases, an investor can be wiped out just from using too much leverage. Let’s see how leverage works and the risk it presents.
All investors face some level of potential liquidity risk. Some securities are more prone to liquidity risk than others. In an effort to manage liquidity risk, there are particular characteristics that you can look out for. Let’s walk through them.
Contrary to what the name suggests, structural risk has nothing to do with the physical structure of the building. Structural risk refers to the financial structure of the investment and the rights that the structure provides to the individual participants. No real estate investment is invulnerable to risk, and investors must understand the potential dangers.
Before investing in real estate, investors typically evaluate the property — which is a process that determines the economic value of an investment — and more accurate valuations can help investors make better decisions. When looking at cost, replacement cost is a common part of property valuation and investors look at this to determine whether the property is under or overvalued. Even with proper property valuation, there are many risks associated with investing in real estate.