What is investment risk?

July 15, 2021

All investments carry some sort of risk, but the level of risk varies depending on the investment you choose.

In general terms, the higher the risk the higher the potential return and the higher the potential loss.

Higher risk investments, such as certain shares, offer the potential for higher returns. This may be acceptable for you if you can tolerate volatility of the stock markets. If you want to access your money at short notice, this type of investment may not be the right one for you.

Lower risk investments, such as government bonds, offer potentially lower but more stable returns, with less chance of losing money. However, returns can be impacted by inflation, which would reduce the long-term value of your investment.

There are other factors that affect risk, such as:

  • Changes in rules and legislations
  • Fluctuations in exchange rates
  • Investments in new and emerging markets
  • Investments linked to commodity markets
  • Investment into smaller companies
  • Over exposure into a single investment
  • Political change
  • Economic change

Investment-related risks

Each type of investment has its own associated risks, some of these being:

Market risk

The risk that your investment may not perform as well as expected due to factors that affect the overall performance of the relevant financial markets.

Currency risk

The risk that your investment will be adversely affected by fluctuations in currency exchange rates.

Liquidity risk

The risk that your investment will be difficult to sell, for example because there are not enough buyers.

Interest rate risk

The possibility that interest rates will fall may affect the value of your investment

Political and economic risk

The risk that certain events (i.e. political upheaval, natural disasters) will weaken financial markets and economies and therefore will reduce the value of your investment

Sector risk

The risk that the value of your investment will fall because of factors impacting a particular sector within a market (e.g. the oil and gas sector within the energy market).

Inflation related-risk

It may feel as if keeping money in cash over the long term would be risk-free, but the real-terms value of your money may be eroded over time due to inflation.

That’s why it’s a good idea to speak to a financial planner who can create the right portfolio based on your own appetite for risk and your plans for the future.

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