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INTRODUCING INVESTMENT

RISK

WHAT SOME OF THESE RISKS MEAN:

  • If your investment is bought and sold in the stock market, you are exposed to market risk as market prices may fall as well as rise.
  • If you are entitled to a regular payment (as with fixed interest securities), there is the risk that the issuer may not be able to keep up these payments or repay at redemption.  This is known as default risk.
  • The issuer may not actually default, but the perception that they might - the credit rating - may change, and this could lower the market value of bonds.  This risk is called credit risk.
  • If the investment is overseas in a foreign currency or a company does business overseas, its value in sterling will be affected by exchange rates.  This is called currency risk.
  • Inflation reduces the future purchasing power of your investments, and the interest you earn may not compensate for this. Inflation risk can therefore affect both your investment objectives and other investment risks.
  • It may be difficult to cash in your investment quickly or at the price you expect. This is called liquidity risk. It is a risk often associated with investments in property, which is a highly illiquid asset.

WHAT IF. . .

I'm not sure how much risk I'm comfortable with?

Risk is a very personal thing - what may be a small amount of risk to one person may be huge to another.

When considering how much risk to take you need to weigh up whether or not you are willing to see a short term loss of capital in order to make long term gains.

The length of time you invest for is crucial.  Generally, the longer your investment time horizon and the less likely you are to need your money at short notice the more risk you may be able to take.

If at any time you are unsure about the suitability of your investments you should contact a qualified financial adviser.

HOW CAN I AVOID RISK?

Risk can never be eliminated but it is possible to manage it successfully.  The principal weapon is "diversification" - spreading your risk.

If you put all of your eggs in one basket, you are vulnerable to risk.  Different investments behave in different ways and are subject to different risks.  Saving your money in a range of assets helps reduce the loss, should one of your investments suffer a downturn.

There is also a need to diversify within each type of investment. This is especially important in the case of share and bond investing, but can even be true of cash, where the risks are generally lowest. Putting all your money in one deposit account runs the risk that the interest paid on that account will change relative to other accounts. This could mean that the interest you receive is no longer as good as when you originally invested.

It is important to remember that all investments have a degree of risk. Even choosing not to invest is risky. The key is to get the right balance. Most people need a mix of assets in order to achieve their goals. The mix required depends upon individual needs.

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