The investments recommended to you have varying degrees of risk and varying rates of return. With most investments, the higher the potential return, 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 (eg. 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 (eg. 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 risk
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 (eg. 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 illiquid assets (eg. real estate)
- Credit risk
The possibility that an institution holding your capital (eg. a debenture issuer) may fail to pay interest or return your capital.
- Regulatory risk
The possibility of government policy changes negatively affecting your financial strategy (eg. 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 risk
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
Volatility is a term that refers to the unpredictable upward and downward shifts of investment values over a period of time. The greater the volatility the more frequent the shifts. In the long term, the greater the volatility the higher the likely returns.
Risk Return Trade Off
There is a relationship between long term risk and return in different asset classes.
The above information is intended to provide a general guide only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of information contained herein but should seek appropriate professional advice based upon their own personal circumstances. Only Financial Services Advice is provided by Peninsula Taxation and Business Centre as an Authorised Representative of BluePrint Advisor Group.