Know your risks
Understand your investment risks
When it comes to investing, it is important to first define your attitude to risk and potential returns. Here we outline some of the key investment risks you need to know about.
Regardless of the type of investment, there will always be some risk involved. As an investor, you need to weigh the potential reward against the risk to decide whether it’s worth investing your money. Gaining an understanding of this risk and reward relationship is key to building your investment philosophy.
Generally speaking, the closer you are to retirement, the lower your appetite for risk. If you are still climbing the career ladder, you may choose a more aggressive investment approach as you have a longer time horizon to recoup any losses.
Whatever your investment approach, it is crucial that you understand the different investment risks involved. Here are some of the main risks.
Market risk is the risk of your investments declining in value due to major economic or political events and even natural disasters. The three main types of market risk include equity (share investments), profit rate (debt investments like bonds) or currency risk (foreign investments).
Liquidity risk is the possibility that you cannot sell your investment at a fair price and get your money out when you want to, so you may have to accept a lower price.
If all your money is invested in only one type of investment, you face the risk of losing a significant amount of money if something goes wrong in that investment or asset class. NBF’s multi-asset portfolios and plans diversify your risk across various industries, investments and geographies.
Credit risk applies to debt instruments like bonds and refers to the possibility of a loss resulting from the failure of a government entity or company (the bond issuer) to repay profit on a loan or to pay the principal at maturity. It is always important to look at the credit rating of the bond.
Reinvestment risk happens when an investment's cash flows earn less in a new security. This could happen when profit rates drop or a bond matures. You can avoid this risk by spending your regular interest payments or the principal at maturity.
If the value of your investments (in particular cash or debt investments like bonds) does not keep up with inflation, you risk a loss in your purchasing power.
Unforeseen events, for example the loss of your job, may shorten your investment horizon because you could be forced to sell your investments early. If the markets are down, you could lose money.
The average life expectancy globally is rising and there is a chance that you could outlive your retirement savings.
Foreign investment risk
Some markets, for example emerging markets, are riskier than established markets, so investors run a risk when investing in the shares of companies operating in these less developed markets. This is due to higher economic, political and social risk.