Inflation risk The real purchasing power of you investment fund is what counts. The certainty of cash returns does not provide security against inflation.
Drawdown Risk The drawdown of a fund is the loss from peak to the current value of a fund. Maximum drawdown is essentially showing you what the worst experience has been if someone invested at the peak and sold at the bottom.
Volatility The standard measure in risk finance.
Liquidity Risk This is the risk that an investment will be difficult to buy or sell at the time you want. This can happen when entering into a “Structured Product”, Tracker type of investment of a Property type investment.
Leverage Risk Some funds use leverage or borrowings , which enhances returns when the underlying asset rises more than the cost of capital. However, leverage/borrowing has a particularly pernicious effect in an environment of declining asset prices, as it forces asset sales at prices which may be below intrinsic value.
Credit or Counterparty Risk
Credit risk has entered the mainstream and is certainly one of the risks people are focused on currently. Counterparty risk is a more general form of credit risk, relating to the inability of a counterparty to a transaction to meet their requirements.
The risk that changes in currency exchange rates causes the value of an investment to decline. This issue is a little more complicated than it appears at face value.
Manager Risk The risk than an investment will underperform due to poor investment decisions by the fund manager is not an inconsequential risk.
Risks when Investing.
In putting together an investment portfolio, the following “risk factors” should be taken into account.
Our role as an investment advisor is to take all of the above on board and work them into an investment strategy. Financial security is not achieved through the avoidance of all risk; this is impossible. It is achieved through appropriate diversification.