Non-diversification risk

Non-diversification risk exists when you rely only on one source of investment. If the investment goes bad, you could lose all your investment, as you have no alternative investment to mitigate the losses. The more effectively you diversify your investments, the less likely you are to suffer from the poor performance of one investment. Do not place all your eggs in one basket.

Liquidity risk

Liquidity risk refers to the ability to convert investments into cash. In other words, it relates to the level of difficulty in selling an asset . Sometimes, an investment may need to be sold quickly, but an illiquid secondary market may prevent the liquidation or limit the funds that can be generated from the liquidation of an asset. Investing in an illiquid investment, like property, can increase the level of liquidity risk of an investor. A diversification of liquid and illiquid investments in your investment portfolio will reduce this risk.

Unfortunately, unforeseen circumstances or emergencies could compel us to draw on money invested in long-term investments. The ability to liquidate an investment is important. At the same time, in selling your investment, you should consider other factors that can result in a loss to your investment, such as withdrawal charges, penalty fees or simply because you have to sell or liquidate when the market price of your investment is low.

Credit risk

Credit risk is associated with debt-type investments such as term deposits, debentures or bonds. It is the risk that the company you have invested in may become insolvent and therefore, will not be able to meet interest payments or repay your funds. Generally, information is the best way to avoid credit risk. For instance, if you are considering a debt-type investment, request for the relevant information, like the company's credit rating, its past financial performance and the composition of its management. This should give an indication of the quality of the company. At the same time, diversification will help in reducing your exposure to credit risk. By spreading your funds among a number of companies or institutions, you can minimise the impact on your portfolio, in the event the company/institution experiences credit difficulties.