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Understanding the risks implied for a portfolio is key for the success of an investment strategy. Nevertheless, most investors talk about the terms “general risk” and/or “market risk” when talking about investing in the securities markets. But literally no one explains what this means or refers to the specific risks which need to be taken into account for a specific investment. This article provides an overview of the most important specific risks which can impact an investment.The term “investment risk” is defined as the possibility of losing some or all of the original investment amount, or the potential for an investment to perform below the expectations of an investor. Therefore, it can also be described as the uncertainty regarding the returns that an investment will generate.That said, there are different types of investment risks which can impact the returns of an investment. These investment risks are:1. Market Risk: The risk of investments losing value due to general market declines. The declines can be driven by:– Equity Risk: The risk that stock prices will fluctuate. Especially during times of market turmoil these fluctuations can be much higher than expected by the investor. The fluctuations may also lead to losses above any observed maximum drawdown in the past.– Interest Rate Risk: The risk that interest rate changes are affecting bond prices. Increasing interest rates lead to lower bond prices, and vice versa. With regard to this, it is worthwhile to mention the duration risk, since the losses from increasing interest rates are getting higher the higher the duration of the bonds are.– Currency Risk: The risk that currency exchange rate fluctuations will affect the value of investments in securities denominated in foreign currencies.2. Credit Risk: The risk that a bond issuer will default on their obligations, leading to a loss of principal or interest payments. In addition, one needs also to take the rating risk into consideration, since a downgrade of the issuer by a rating agency may lead to lower bond prices.3. Liquidity Risk: The risk that an investor will not be able to buy or sell an investment quickly at a fair price. This risk can be divided in risk at the securities level, as single securities may lack the liquidity need for a given transaction, and a political risk, as measures taken by governments such as capital controls or sanctions can freeze all assets held in or by investors from the affected country.4. Inflation Risk: The risk that inflation will erode the purchasing power of investment returns.5. Political Risk: The risk that political changes or instability in a country can affect investment returns and/or the ability to transfer assets to or out of a country (Please see liquidity risk for example).6. Reinvestment Risk: The risk that future cash flows (e.g., coupon payments or dividends) will have to be reinvested at a lower potential return than the original investment. This risk is also relevant if a fund or ETF is liquidated by the fund/ETF promoter, since the investor may not find an appropriate follow up investment.7. Sector Risk: The risk that a particular sector of the economy will perform poorly, affecting investments in that sector. This risk is especially relevant for those investors who invest in sector, themed, or factor-based funds and ETFs8. Specific Risk the so-called Idiosyncratic Risk: The risk associated with a particular company or investment, independent of market movements. The risks range from wrong tactical or strategic decisions made by the management of a company to fraudulent financial reports. For mutual funds these risks include:– Management (style) Risk: the respective fund or ETF may underperform its benchmark or the general market due to the investment philosophy (style) of the respective fund manager.– Key Person Risk: the change of the leading fund manager or any other key person in the management process might have a large impact on the future performance of the respective fund.– Derivatives Risk: the use of derivatives or other modern portfolio management techniques may lead to additional risk such as the so-called counterparty risk in the respective portfolio. In addition, it is noteworthy that the usage of derivatives may enhance the overall risk profile of the portfolio.– Closure Risk: the fund or ETF gets merged or liquidated by the fund promoter (please refer also to reinvestment risk).– Cost Risk: Costs/fees and expenses are an overlooked risk factor. If the total cost of ownership for a fund is higher than the expected return, the costs will reduce the investment amount.This list doesn’t claim to be complete, as investors might face more risk within a given fund. But the author hopes that it will help investors to make more informed decisions as it shows the key risks for investors.That said, it is crucial for investors to understand the risks of a given investment to make informed decisions and diversify their portfolios to mitigate potential losses. That said, even as diversification is seen as the first line of defense in a portfolio, it can’t eliminate all risks within the portfolio.There are several measures to evaluate investment risk. Each of those measures provide different insights into the potential risks associated with an investment. In addition to this, there are also different measures on how a portfolio/fund/ETF has behaved during periods of market turmoil which enable investors to evaluate if a fund were able to weather the storm or not and if the return received per unit of risk taken by the investor was sufficient. These measures will be discussed in the next article of this series.More By This Author:Russell 2000 Earnings Dashboard 24Q2Equity ETFs Attract $20.9 Billion, Largest Weekly Intake Of 2024MicroStrategy Is Hedge Funds’ Favorite Meme Stock