In doing business, things that are always discussed are not far from financial management issues in order to achieve business goals. The term that is often discussed is about risk assets. Where, risk assets include important components that can affect the running of the company. Because, if it is not processed it will give a loss to the company.
Therefore, in order to find out more about the term. The following has presented the definition of risk assets to examples of risk assets. Well, what are you waiting for? Let’s find out the discussion below.
Definition of Risk Assets
Before knowing about the meaning of risk assets, you first need to know in advance about the definition of assets. Where, the assets themselves are all types of assets owned by the company that can be measured in money including intangible forms such as patents. Furthermore, you also need to understand about risks.
In finance, risk means that there is a possibility that actual results may differ from those that have been measured or desired. Meanwhile, the definition of risk assets is assets or can also be called assets owned by companies that have an uncertain rate of return.
In general, experts associate risky assets with assets that have a significant level of volatility or price changes. Examples are commodities, equities, high yield bonds, real estate and currencies.
In the banking and financial sector, assets with values that often fluctuate due to changes in interest rates, payment risk, credit quality, and so on are also included in the category of risky assets. It is said to be risky because the returns to be obtained in the future are uncertain.
For example, an investor buys current GoJek shares and aims to hold those shares for a year. When making a purchase, you don’t know what rate of return you will get. Then the return or return on capital obtained depends on the value of Gojek’s share price in the next year and dividends for 1 year.
So it can be concluded that stocks are risky assets. It also includes securities issued by the government or bonds included in risk assets. For example, bonds with a maturity of 30 years, investors cannot calculate the amount of return they will get if the bonds are only kept for 1 year.
How Does Risk Affect The Portfolio?
A portfolio is defined as a collection of financial investment instruments, including, among others, bonds, stocks, mutual funds, commodities, cash, cash equivalents and all forms of investment that are traded on exchanges and most recently, namely cryptocurrencies. The influence of risky assets can be seen from the irregular rise and fall in the value of cryptocurrencies are examples of fluctuations that describe the state of the market.
Where, the crypto coin market at that time was still following the growth in bitcoin prices. When the price of bitcoin soars in value, it can have an impact on the condition of the crypto market as a whole to experience a rapid increase. Most traditional financial institutions are starting to dive into the world of blockchain which underlies the validation of cryptocurrency transactions.
Beginner investors in cryptocurrency observe large profits and other affected investors want to get rich by investing, but do not measure the amount of risk they get. Investors’ desire for a quick return on investment attracts new investors, this can be described as hype or overhype.
In the end, investing in digital currency can reach its risk point, which is a sudden sharp decline. This condition resulted in a sudden drop in value that wiped out not only profits, but all the value of some investments in cryptocurrencies. Increased discussion for the potential for regulation of cryptocurrencies, coupled with fears of over-speculation, and contributed to the decline of this risky asset.
Understanding of Risk Assets and Free Assets
The risk in making this investment is that an investor can choose to invest in various assets, be it risky assets or risk-free assets, or a combination of the two assets. Choose an investor for the asset will depend on the extent of an investor’s preference for risk.
The more averse an investor is to risk, the more investment choices tend to be in risk-free assets. Where, the notion of risky assets, namely assets whose actual rate of return in the future still contains an uncertainty.
Meanwhile, the notion of a risk-free asset is an asset whose return in the future can already be ascertained at present and is indicated by a return variance equal to zero. With one example of a risk-free asset, namely short-term bonds issued by the government. In addition, other examples of risk-free assets include debt securities issued by a country’s central bank. In Indonesia alone, these assets are in the form of Indonesian bank certificates.
Determining the Optimal Asset Class
Basically, a portfolio management consists of 3 (three) main activities, including making asset allocation decisions, selecting the portion of funds to be invested in each asset class, and determining the assets of each predetermined asset class. In the discussion of being a Markowitz portfolio model, it is generally used in determining portfolios consisting of individual assets and not for use in determining portfolios consisting of various asset classes.
Where, the asset class itself is the grouping of assets based on the types of assets, for example stocks, bonds, foreign securities, and so on. This decision for asset allocation does not only cover the selection of the allocation of funds to asset classes in one country, but can also be made in a number of countries.
The benefits that you can get from diversifying various asset classes in a number of these countries are basically the same as the benefits of diversifying individual assets, namely the benefits of reducing risk to a certain level of desired return. Similar to the portfolio on individual assets, the optimal asset class portfolio will be determined by the investor’s preference on the desired return and risk. If there is a clear portfolio of assets that match investor preferences, then that portfolio will later become an optimal portfolio.
What is the Ideal Investment Portfolio?
An ideal portfolio will be arranged according to the balance of return and risk. Where, the return itself is a reward or result to be obtained in the future caused by the investment of funds or investments made by an investor. Meanwhile, risk is an opportunity for a deviation from an average rate of return or return desired by investors.
For example, you have plans to buy a house in 3 years time frame and you probably don’t want to put your money in a risky asset either. And you want your savings to be available when you are ready to pay a down payment on a house.
So you are currently optimizing for security and also less return. Your portfolio may be allocated more toward low-income bonds and cash, and only slightly toward equities. Where, if you invest for a goal in the next 10 years, then you might not have a problem with the current risk considering that your investment horizon is still long.
So to maximize your returns, you may need to allocate more equity in your portfolio, then bonds and some cash. In essence, that you need to understand about returns and risks just like you before buying other items that have great value. You need to make sure and know the risks behind it.
Types of Risky Assets
There are several types of risky assets that you need to know and recognize. Then, which one is most at risk? The following are the types of risky assets that you need to understand and know about so you can consider before you finally invest with this instrument. What are they? Let’s find out the detailed discussion below.
Many investors say that cryptocurrency is one of the riskiest assets. There is no guarantee of money back because of a decrease in the value of cryptocurrencies, which results in investors having to lose some of the profits they might get when the value of cryptocurrencies rises.
Profits and losses in this cryptocurrency are very dependent on the value of bitcoins and also the state of the global economy. Negative news can cause cryptocurrency prices to drop sharply. This causes investors to bear losses.
Before making an investment using this cryptocurrency, it is very important for you to consider in advance the size of the capital that will be invested later. You need to make sure that the capital is money that is willing to lose, considering that the amount of loss in cryptocurrency can reach 90% of capital. If you are not ready for this, cryptocurrency is not the right financial product for you.
Another type of risky asset, apart from cryptocurrencies, is stocks. There are several stocks that are included in the line of risky assets. The success or failure of an investor in stock investment is very dependent on knowledge and dexterity in analyzing market conditions. Because based on this analysis, it states that an investor can determine whether the price of a stock will go up or down.
In addition, according to price fluctuations, the risk that is borne when playing stocks is whether or not dividends are distributed to investors each year. This dividend distribution is carried out according to the performance of a company for one year. So that the level of risk and return you get needs to be considered as well as possible in order to anticipate the risk of losing a very large amount of money.
Real estate is a very promising asset, especially in the long term. However, this state of coma doesn’t always go the way you want, especially during a crisis.
Because, there will be a price reduction caused by a crisis coupled with additional costs, such as maintenance costs. Of course, it can automatically reduce the level of profit earned from real estate investment. Even so, real estate has always been considered the safest activity among the other two risky assets.
However, the only problem is that the price is quite expensive. So that investors need to save first or apply for a loan to the bank so they can buy the real estate they want.
Tips for Reducing Losses From Risk Assets
The name is also investing, which is expected to be of course the maximum profit. The risks that arise when investing can actually be minimized. There are several tips for reducing losses from risky assets. What are they? The following are tips for reducing losses from risk assets in order to minimize losses from risk assets, including:
1. Dividing Capital Appropriately
The first tip you can do to minimize losses when investing is to divide capital appropriately into different assets. For example, diversifying investments into cryptocurrencies, stocks and gold. Of course, what product do you think is most appropriate. The most important thing is that your money is not put in one basket.
If one of your assets fails, then you still have other assets that might be able to provide benefits for you. If the losses incurred can be covered by a number of profits from other assets, then your financial burden will be reduced automatically.
2. Defining Assets Correctly
In investing, especially risky assets, it is very important to know your investment objectives in advance so that you can determine the right activities. Because in the financial market itself, there are various types of assets that you can buy. There are stocks, mutual funds, bonds, and deposits. These assets offer benefits with different levels of risk.
For assets with minimal risk, you can choose deposits. However, for assets that have a high risk, you can choose stocks. So, adjust it to the risk profile of each asset so you don’t make a wrong decision. So that later you can accept no matter how big the loss that occurs.
3. Calm When Asset Value Decreases
Tips that are no less important are to stay calm when the value of assets decreases. You need to understand when investing has its ups and downs. Not always profitable and not always losing, because the portion of profits and losses is usually balanced.
The key is that you need to be patient when you experience big losses, because there are times when asset prices will rise again, namely when the sentiment in the market turns positive. if you have excess capital then take advantage of this decrease to buy other assets whose prices are falling. So when the price goes up you can get the maximum profit.
4. Don’t overdo it
The biggest fear of most people when investing is losing money. That is why some people don’t want to invest because they are not ready to take the risk of losses that arise at any time. whereas loss is a very natural thing as long as you can respond with a positive attitude and not overdo it.
It is not exaggerated here to mean that one is willing to take on debt in order to obtain capital to make an investment. So, you need to keep investing money in a reasonable portion, which is according to everyone’s financial situation. don’t be afraid to miss the train because there are many other benefits that you can get on different occasions.
5. Have the Right Investment Mindset
A successful investor is an investor who is not afraid to take risks when investing. Instill this mindset in yourself so that whatever risk assets you choose to invest in will bring the profit you want. if you lose, then you need to learn more to analyze the information available on the market and its impact on investment.
The right mindset will change the way you invest. So that the actions you take will lead you to success.
So, those are some discussions related to the definition of assets and risks and some things related to them. Hopefully the discussion above can add insight to the knowledge of readers regarding risk assets.