Understanding Risk

Investment risk refers to the likelihood that your investment could decrease in value or not make as much money as projected or anticipated. Before making investments, we strongly recommend that you consider investment risks and discuss this with an adviser.

The main or significant risks of investing include;

Credit Risk

In a fixed interest investment, a credit risk is when the company you have invested in is unable to pay the income you have earned, or to repay you when you sell your shares.

Currency Risk

The risk that overseas investments gain or lose value as a result of a falling or rising Australian dollar. If you own assets overseas or foreign shares, you may face a currency risk. This is where the value of currencies fluctuates and affects the return from overseas investments. A rise in the Australian dollar may reduce the value of your overseas asset. You can pay to hedge against the risk by contracting to buy or sell a certain currency at a specific exchange rate at a future date.

Derivatives Risk

The risk hat exposure to exchange-traded and over the counter derivative instruments increases the risk in a portfolio or exposes a portfolio to additional risks. Such as the possibility that a position is difficult or costly to reverse or that there is an adverse movement in the asset, interest rate, exchange rate or index underlying the derivative.

Diversification Risk

Diversification risk is the risk of investing in one or few asset classes, or even a single investment, such as a rental property or a solicitor’s mortgage. The performance and eventual repayment of your investment depends on the performance of this single investment. Many investment professionals recommend diversifying and may use the saying “don’t put all your eggs in the one basket”.

Individual Asset Risk

The risk attributable to the Individual Assets within a particular asset class. Individual assets can and do rise and fall in value for many reasons such as changes in the operations or management of a fund or entity, or the business environment that it operates within.

Inflation Risk

Inflation risk is the risk that the real value ( i.e. the purchasing power) of your investment may not keep up with inflation. This risk will occur if your investment is likely to provide a net (after tax) return less than the prevailing inflation rate.

Investment Manager Risk

A manager risk is the risk that an investment is made only on past performance, without considering staff, ownership, market regulatory or strategy changes.

Liquidity Risk 

Liquidity risk is the risk that you may not be able to readily cash in your investment when you need immediate access to your funds in which case you may have to:

• redeem your investment at less than face value and make a loss, or
• agree to have the current interest rate adjusted because the investment was not retained to maturity, or
• wait until your investment matures, which could mean you miss out on other opportunities that may arise in the meantime.

Market Risk

Market risk is the risk that investment market movements will result in investment values falling. For example, if you buy shares in a gold mining company at a certain share price and the price of gold falls (for whatever reason), it is highly likely that the price of your shares in the gold company will also fall.

Negative Returns

There is a risk that investments will have negative returns, causing an investor to lose principal capital and earnings.

Policy Risk

Changes are frequently made for example to Superannuation Law, and may also occur to the taxation of superannuation, which can impact the value of an investment or the ability to access a benefit.

Political Risk/Regulatory Risk

Regulatory risk is the risk that government policy or legislation will change, which could impact on the effectiveness of your investment strategy.

Pricing/Value Risk

Pricing or value risk is the risk that your investment may be purchased at too high a unit cost and will drop in value when the market re-assesses its worth. This is often evident when a boom market withstands a correction – those who bought in just before or when the market had reached its top will lose the most.

Re-Investment Risk

In a fixed interest investment, re-investment risk is when you may have to accept a lower rate of interest when re-investing for another fixed term because of changes in market interest rates.

Strategy Risk

Strategy risk is the risk that an investment strategy may no longer be appropriate for you because of the impact of legislative or policy changes on your financial circumstances or objectives. This is why you should review your portfolio regularly.

Taxation Risk

The risk that taxation laws and their interpretation may change in the future in a manner that may adversely impact the taxation outcomes for investors.

Timing Risk

Timing risk is the risk that in attempting to time market entry/exit you will be exposed to increased short term volatility and may end up “buying in at the top, or selling out at the bottom”. It is also very important for you to have an appropriate investment time frame in mind. Some people may invest in assets intended for the long term, with a view to making short term gains. These people are often disappointed if they have to sell their investment at a loss. Most people cannot time the market successfully.

Volatility Risk

The instability of a particular investment.