What Are the Different Types of Investment Risks?

Investment risk refers to the risk that an investment entity undertakes in order to achieve its investment objectives, which may cause losses or bankruptcy in future operations and financial activities. Investment risk is the main content of the predictive analysis conducted by an investment entity to decide whether to invest. The main factors leading to investment risk are: changes in government policies, mismanagement of management, significant increases in the prices of important materials that form the cost of a product, a sharp fall in product prices, and a sharp rise in borrowing rates. ^[1]

investment risk

Investment risk refers to the uncertainty of future investment returns.

Investment risk identification is the process by which risk managers use relevant knowledge and methods to systematically, comprehensively and continuously discover the sources of risks faced by investment activities, determine the conditions under which risks occur, describe the characteristics of risks, and evaluate the impact of risks. Investment risk identification is the first step in risk management. Only by comprehensively and accurately identifying and identifying investment risks can we measure risks and choose strategies to deal with them.

The identification of investment risks has the following characteristics:

(1) The identification of investment risk is a complex systematic project. Because of the ubiquity of risk and its existence, it is determined that the risks in the investment process belong to the scope of risk identification. At the same time, in order to accurately and comprehensively discover and identify risks, risk management departments and production departments,

There are a number of reasons why corporate investment decisions are wrong. Causes various serious consequences, mainly in the following areas:

(1) The investment decision-making mechanism is not complete, and its responsibilities are unclear. It is easy to be affected by the "Chief Executive's Will", or the leader may be blindly clapped by a momentary brainstorm, resulting in arbitrary, subjective, blind, and arbitrary decisions.

(2) In order to compete for the project,

Eight key points of investment risk control

We all know that investment behavior is divided into two categories: one is project investment and capital construction investment. The first is equity investment and merger and acquisition investment. In many cases, the two behaviors intersect.

Of course, investment has risks. For large-scale investment over the years, a certain percentage of losses is inevitable. It can also be seen as the cost of the investment. However, investment losses should always have a reasonable boundary, such as the average loss rate of domestic and foreign industries, and EVA value. What is the reason why the investment loss exceeds a reasonable boundary? How to control investment risk?

This article focuses on discussing project construction investment risks.

According to my work experience, investing in risk control requires research to solve eight problems.

I. Decision risk

Refers to the decision-making before the project is established, whether to do a project feasibility study. For example, industry risk. When entering a new industry, it is necessary to study industry risks. If the industry is too risky and unsustainable. Then there is no need to consider investing in this industry again. Such as "going out" country risks. After assessing that the country where the proposed project is located is too risky and cannot be controlled, the premise of project investment no longer exists. Before investing in a decision-making project, if you only see trees and forests, it will be futile to do the next job.

2. Project feasibility study risks

The project investment research report is called a feasibility study report. Is the project feasible? Why does it work? But in fact, quite a lot of feasibility reports are qualitative and feasible before demonstrating it. This is to prove that your decision is correct. If the project investment needs to be approved by the higher authorities and the government, it will go to the next level. The report is fully seated. Therefore it is called "approvability" report. Frankly, I wrote the "approvability" report when I was working in an enterprise. When writing the "approvability" report, you can completely decouple from the actual situation, and you can also add fuel and jealousy. This problem has not been solved so far. The "approvability" report is a fishing report, the purpose of which is to catch fish. If the decision is based on "approvability" reports and phishing reports, how big this risk is can be imagined.

Third, the risk of decision-making system

An important reason why some companies in the United States experienced problems during the financial crisis is that their boards of directors have failed. If the feasibility report is not credible, the board of directors will become invalid again, and all relevant information will be lost. Where is the problem? There are independent directors on the board of directors of American companies, but the independent directors on the company's board of directors are invited by the chairman and should be friends of the chairman. The chairman also serves as the CEO, which determines that it is difficult for independent directors to become independent, express their will independently of management, and make it difficult to establish checks and balances on management decisions. Independent directors and the chairman have conflicts of interest. I have visited the Zurich Insurance Company in Switzerland and all of their directors after 2000 were outside directors. The structure of the board of directors ensures that the board of directors can both listen to management's opinions and make decisions independently of management. The chairman is of course an outside director and has no conflict of interest with the management. The financial crisis Zurich Insurance Company did not make big mistakes, which was directly related to the board structure and board decisions. The board structure is a big issue for us.

The principle of the trial of the board of directors of a wholly state-owned company currently underway by the State-owned Assets Supervision and Administration Commission of the State Council is that the investor directly selects external directors, and of course, internal directors. The second is that more than half of the outside directors are required. Outside directors have responsibilities, debriefing, tenure, and remuneration. Outside directors are responsible to investors. The provenance of outside directors ensures their independence and avoids conflicts of interest. The structure of the board of directors, with responsible shareholders, is an effective guarantee for board decisions. This cannot be achieved, and the independent quality and external supervision of independent directors cannot be trusted. The structure of the board of directors of SASAC pilot companies is very different from that of US companies.

Fourth, investment cost control risk

The basis of enterprise competitiveness lies in cost control. Because the price is not the buyer, but the market. The impact of cost was not obvious during the economic upswing, and it was only seen clearly in the economic crisis. The economic crisis has come, and some companies in the same industry can't support it. They have suffered serious losses and closed their doors. Some are just declining profits. It's okay to survive. Why? The key is cost. The cost component of an enterprise is primarily investment cost, followed by operating cost. Among the investment costs, if two identical projects are invested, if the industry average investment cost is 100, the investment cost of a project is 130, and the investment cost of a project is 90, the high cost of these two companies will directly affect the incomplete The size of the cost. In the future, the impact of operating costs on final costs is limited. The key is investment costs. Investment costs determine the competitiveness of an enterprise to a certain extent. Formosa Plastics Wang Yongqing donated a building to a university in Beijing. Wang Yongqing said that you only need to import equipment, because you can apply for tax exemption, and we will take care of the rest. Wang Yongqing's philosophy requires not only first-class standards, but also first-class costs. The building is the best, but the cost is the lowest. The first-class level is easy to achieve, who will not spend money? Best-in-class costs are the hardest to achieve. Many of our projects are built at the same time as first-class costs. The estimates are over budget, and the investment has been lost right from the start. The boss of a five-star hotel told me that if this hotel was invested by him, the investment cost could be reduced by 1/3. All of this 1/3 has gone into house prices or eroded profits.

5. Risks of the investment system.

Our investment system also needs to be researched. Investment entities must diversify equity as much as possible, bring in different interest entities, and bring in different resources, such as technology, management, talent, channels, brands, and funds. . To ensure the high quality and low cost of project construction, it is necessary to install the management team of the project construction enterprise if necessary. For example, if the project management team of an enterprise is allowed to invest 10% and 20% of its shares, which is tied to other shareholders' interests and corporate interests, then the cost control will be different. Their own risks and investments will be in it, and that system will work. What problem does this solve? Address opportunistic and moral hazards for project management teams.

Risks of the legal person responsibility system of the project

The establishment of the project legal person responsibility system is to solve the project market investigation, feasibility study, project construction, and the entire process of enterprise operation. This person is not a natural person, but a project legal person. Natural persons cannot afford such a great responsibility. Such as the past project commander. The traditional approach is to manage the project in sections, do project market research, project construction, and project operation as different institutions and different people. When there is a problem, they push each other and no one is responsible. For the construction of the Three Gorges Project, the Yangtze River Three Gorges Corporation was established from the beginning. The company is fully responsible for the project feasibility study and completion of the project. This system is not really fully established. This involves the issue of "full life cycle of project construction".

VII. Project construction assessment risk

Many companies did not keep up with the corresponding assessment after project decision-making. They took the lead, and paid more attention to the decision-making process. The project construction requirements should be included in the assessment of the project execution team and the assessment of the project legal person.

Post-construction evaluation system

After each project is completed and operated, the company does not conduct much post-assessment of the project based on the evaluation indicators of the feasibility report. Some post-assessments are in the form and seem to have done it, but have not really done it. Why do we need a post-construction evaluation? The first is to clarify responsibilities, and the second is to clarify rewards and punishments. If you have done a good job, you must give a reward.

These are the unresolved issues in our investment risk. These investment risks cannot be controlled, and the investment effect is naturally not much better. ^[2]

The loss of purchasing power is because the return realized by the investment is too low to compensate for the reduction in principal due to taxation and inflation. Obviously, investing too conservatively is also risky. To achieve gains after deducting inflation and taxation factors, some uncertainty must be tolerated.

Each investor has its own level of risk tolerance and can use short-term losses that it is willing to accept in order to achieve long-term goals as a measure of risk level. If the risk is too great, you will sell all your positions in panic when the market drops. However, if you always pay attention to risk tolerance when building an investment portfolio, you can calmly face the decline in the market and achieve your investment goals. Investors should not accept risks beyond their tolerance, otherwise it will inevitably lead to the failure of financial management. Investors should choose the type of fund whose risk level is within their own tolerance for investment according to their own risk tolerance level. For example, for an investor with an annual loss tolerance of only 4%, a more suitable investment option should be a bond-based fund rather than a stock-based fund.

The dam investment research consultancy in the United States has made a special study on the returns of common investors in the United States to invest in mutual funds. The conclusion is roughly as follows: In the big bull market that ended in 2000, the S & P 500 index rose 16% annually U.S. equity mutual funds have an average annual return of 13.8%. Considering the average rate of 220 basis points for stock mutual funds, this result is not surprising. The strange thing is that the average annual rate of return for ordinary investors is only 7%. This phenomenon occurs because they are always making mistakes. The timing is to switch between different funds or between cash.

And Jeremy J. Siegel's measurement of risk levels under different holding periods provides more powerful support for long-term investments. The risk is calculated based on the standard deviation of the actual rate of return under different holding periods from 1802 to 2001. With the extension of the holding period, the risk levels of different asset types are decreasing, which is even more surprising. The point is that once the holding period grows to 15-20 years, the standard deviation of the average annual return on stocks is less than the standard deviation of the average return on bonds and Treasury bills. If the holding period exceeds 30 years, the stock risk is less than 3/4 of the bond's Treasury risk. The significance of this research conclusion is that in an investment from a long-term perspective, the actual risk to investors is much lower than the risk level of short-term investment behavior, thereby avoiding irrational investment behavior caused by short-term asset fluctuations. .

The performance of China's stock market also reflects this. In the six years from 2001 to 2006, equity funds have brought investors an annual compound return of 21% as a whole. For ordinary investors who are too concerned about short-term returns, it is difficult to correctly face the fund performance during the period. Due to short-term fluctuations, it is impossible to enjoy the reasonable returns given by the market in a complete market cycle.