Types of Risk

On entrance of any investment, returns have varying degrees of risk and varying rates of return. With most investments, the higher the potential returns the higher the level of risk. However, these risks are reduced over a long-term time frame and via diversification.

The types of investment risks, which may have an impact on your plan, include:

Inflation risk

The possibility that the purchasing power of your money may not keep pace with inflation (e.g. by not investing at all or not investing sufficiently in growth products). The risk is a poor real return on funds invested.

Risk of not diversifying

The possibility that if you put all your investment capital into one basket (e.g. the share market) a fall in that market will adversely affect all of your capital. Diversification is a deliberate strategy aimed at reducing the impact that volatility in one asset class, sector or single product will have on your overall portfolio of assets.

Market risks

The possibility that movements in a market can cause an investment to decrease as well as increase in value . Re-investment risk

The possibility that if you invest in fixed rate investments (e.g. bonds) you may have to re-invest maturing money at a lower rate of interest if rates generally decline during the life of that investment.

Liquidity risk

The possibility that you may not be able to readily access your funds when you want or need them most because they are invested in non liquid assets (e.g. real estate).

Credit risk

The possibility that an institution holding your capital (e.g. a debenture issuer) may fail to pay interest or return your capital.

Regulatory risks

The possibility of government policy changes negatively affecting your financial strategy (e.g. superannuation and retirement incomes policy).

Timing risk

The possibility that a strategy of trying to time entry and exit from markets will expose you to greater short-term volatility.

Value risks

The possibility you will pay too much for a particular product or that you will sell it too cheaply.

Manager risk

The possibility that you will invest with a fund manager based primarily on their recent past performance without regard to their fundamental ability to cater to your particular needs or performance expectations over the time frame you have in mind.

Currency risk

The possibility that investments held in other countries may rise or fall in value due to the relative value of the currency they are held in to the domestic (Australian) currency.