Investment risks — the need for financial literacy
THESE past two years, many people experienced a shift in their personal finances. With the economic collapse brought by Covid-19 comes the surge of jobless individuals and businessmen who have lost their capital as their businesses were brought to a halt. At that time, no one had any idea how long it would last, but a rush of urgency immediately took place as the society hungered for financial stability. In other terms, people's need for money.
As the pandemic continues, the drought for financial income increases. Society became desperate and tried different methods to earn money. A lot of individuals, particularly those who never took any business courses, tried and took the risk of investing in different platforms just for the sake of earning. Several tried to open local businesses, some tried the online selling trend, while others discovered investing in stocks and cryptocurrencies. However, all investments carry a degree of risk and proper financial knowledge is discretely recommended in all forms of investments.
Take for example the crypto market that soared in value while the world is struggling. Who would have thought that despite real-world turmoil, the value of cryptocurrencies will reach its all-time highs? This brought attention to individuals longing for positive investments. As such, many tried to put their money in crypto, hoping to get some high returns in a short period of time. This includes buying specific tokens similar to stocks in a stock market, while others engaged in NFT-based activities to farm those tokens in exchange for money. Without a doubt, many of those who took the risk successfully earned a significant amount of profits which, in turn, brought another surge of new investors hoping to experience the same. However, part of these investors doesn't have adequate financial literacy to understand the potential risks they are undertaking. The excitement caused irrational and impulsive decisions. With insufficient research about the market, they released their money blindly for a potential profit just because some of their friends or relatives had done so. This caused a shock of realization to many when some of these individuals suddenly lost a large amount of money, they realized they cannot afford to lose.
Risk and reward are the most common concepts one should understand in investing. When you invest, you make decisions on where to put your financial assets. These decisions should always include the rewards obtainable and the potential risk it carries. Two concepts that are typically correlated as the level of reward, matches the level of risk implied. Stocks, bonds, mutual funds and cryptocurrencies are not always going up but can lose some value and potentially all its value, depending on the market condition. Multiple factors can significantly affect the value of your investment. Hence, the common concept of "invest what you can afford to lose" needs to be embedded in the minds of investors. Knowing all of these is a must for someone to stay on track and well-prepared for any circumstances that may occur.
Truth be told, there is no easy way to earn money while taking the safest approach in doing so. There is always a risk. One thing that needs to be done is to become financially literate. It is the basic level of foundation a person should do before trying to decide about what to do with money. A lot has already suffered financial losses for they tried to invest into something without properly understanding its nature. Hence, before you start investing, make sure you are well-prepared.
"Financial literacy is a lifelong journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money." – Jason Fernando
Jessica Mae Gois, CPA is the audit manager of Paguio, Dumayas and Associates, CPAs (PDAC)-PrimeGlobal Philippines and a member of Acpapp. The views and opinions in this article are hers and do not represent those of PDAC and Acpapp.