What Is Investment Risk And How To Avoid It

What Is Investment Risk And How To Avoid It
Underwater by Andy Deitsch. Why?

In order to invest successfully, and avoid worrying about your money, you need to understand about the many different forms of investment risk and how to manage them

Whether It’s Your Pension Fund Or Your Cash, Almost Every Investment Carries A Degree Of Risk

What Is Investment Risk?

Investment risk refers to the chance that the actual return you get on an investment will be different from the earnings or outcome that you expected.

This includes the possibility of losing some, or all, of your original investment.

Four Key Investment Risks In Retirement

Morningstar’s director of personal finance, Christine Benz, discusses four of the key risks facing retirees.

investment risk

Types Of Investment Risk

It won’t surprise you to learn there are an incredible number investment risks. 

Listed below in alphabetical order, and not in order of importance, are 13 of the main investment risks.  You should become familiar and comfortable with them all, particularly in respect of any investment you’re considering, before you part with your money.

Business Risk

Currency Risk

Counterparty Risk

Credit Risk

Inflation Risk

Interest Rate Risk

Liquidity Risk

Management Risk

Market Risk

Political Risk

Regulatory Risk

Stock Specific Risk

Volatility Risk

A short but very helpful summary of each investment risk is covered on the Monevator website.

Five Things To Consider About Investment Risk

  1. The greater return you want, the more risk you'll usually have to accept.
  2. The more risk you take with your investments, the greater the chance of losing some or all of your capital.
  3. If you're saving over the short term, it'll probably pay you to avoid putting your capital at risk.  Establish the purpose of your investment and when you’ll need your money back, as this will have a major impact on the types of investment that are best suited to you.
  4. If you're investing for the long term, you can afford to take more risk as your money has more time to recover from falls in value.
  5. Investing in stockmarket assets has historically proved to be one of the best ways for delivering growth that outstrips inflation, but there are many associated risks with such investments.

There Must Be A Risk!

That was the big announcement in the Budget in November 2017, in relation to tax efficient investments including EIS, SEIS and VCTs. 

To quote HMRC’s Venture Capital Schemes Manual...

Tax relief is offered as an incentive to invest in these companies because of the higher risk such investments pose to the investors’ capital.  The tax-advantaged venture capital schemes are therefore aimed at investors who are prepared to lose some or all of their capital in making a higher risk investment.

Here’s some detailed information about how to profit from tax efficient investments now.

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Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).

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