Investment risk
What does investment risk it mean to you
The idea that higher risk investment should offer potentially higher returns is understood by most people - otherwise most peoples money would remain on deposit.
To most people the simplest definition of investment risk is the possibility that they will not get back all of their initial capital when the investment matures or when they need to access it.
Before you make any investment you should consider;
time horizon for your investment
potential needs to access some of the monies before this date
return needed to meet the target i.e. retirement fund, children’s education account
if return was to fall short of the target, what is the maximum I/we could tolerate
how upset would i feel if the investment fund would fall by 5%, 10%, 15%, 20%, 30% or 50% or all of it during the investment period
do I have the capacity to loss during the investment period i.e. assets, liabilities, income, outgoings and any anticipated future commitments (financial dependents etc)
What are the possible factors that you need to consider that may lead to a disappointing outcome
Market risk - Investment funds are speculative in nature and future prices may trad lower than current prices. For example, a U.S., European or global economic recession may result in stock, bond or financial markets weakening significantly. Global geo-political or climatic events can cause a disruption to markets. Corporate earnings could fall, dividend levels could decrease. Credit Ratings may change. Economic policies, taxation policy, interest rates or tax rates may change.
Inflation risk - Inflation is the enemy of savers. Unlike Market Risk, it is asymmetric - it will never work in your favour. Central Banks currently devise monetary policy with a 2% inflation level (or a little greater at the moment). NB - a 3% inflation rate is enough to erode real purchasing power by 25% within 10 years.
Debt risk - The effect of debt within an investment fund magnifies the losses.
Counter-party risk - This is probably the most underestimated risk of all. The return of your invested capital and any growth due is dependent on the product provider paying back the amounts due under its obligations on the investment - it may default. This is called Counterparty Risk or Credit Risk. In Ireland the Central Bank supervises the solvency of the life assurance companies, ensuring there is a buffer of capital - the solvency margin - between their total assets and liabilities to policy holders. The Solvency and Financial Condition Report (SFCR) aims to give the general public an overview of an insurance company’s financial condition and regulatory solvency position. The report includes information on a company's business performance, system of governance, risk profile, and capital management. All legal entities based in European Union jurisdictions have to comply with the disclosure requirements anchored in the Solvency II Directive. This document is based upon historical financial information and could change in the future.
Volatility risk - Funds, indices, commodities, bonds and equity markets can all be particularly volatile and can be influenced by global economic growth, geo political risks, wars, economic sanctions, currency exchange rate movements, consumption patterns, technological developments, interest rates, market disruptions and also speculative trading
Excessive costs - Fees and charges can be complex. They may include policy fees, allocation rates, bid/offer spreads, management fees, early encashment charges, performance fees to fund managers. over the longer term the ‘impact of charges’ can vary significantly.
Taxation risk - All investments are subject to taxation. Pensions are however tax efficient. Tax changes can interfere with investment outcomes.
Under European Union legislation, the advisor is also required to prepare Key Information Documents (KIDs) and fund information sheets for investment products and funds. A KID is a short document which will provide you with key features, risks and costs associated with the relevant product. It is designed to help you make a more informed decision on whether the product is right for you. Each KID follows the same format to enable you compare investment products. Information includes the investment objectives, the type of investor it is suitable for, costs and the risk indicator for the product. These documents can be found on the providers website or requested from the advisor.
Want to know more? We are available to discuss your options, and we look forward to hearing from you.
Our job is to help you choose a product and structure that will help you meet your goals.
telephone | 091441188 and/or email | office@nelsonlife.ie
RETIREMENT & PENSIONS | INVESTMENTS | FINANCIAL PLANNING | LIFE INSURANCE
Nelson Life Limited trading as Nelson Life is regulated by the Central Bank of Ireland.
WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. WARNING: You may lose some or all of the money you invest. WARNING: These funds may be affected by changes in currency exchange rates. WARNING: If you invest into this product you will have access until you retire (Pension Products). WARNING: The above content does not constitute investment advice, as it does not take into account the investment objectives, knowledge and experience of financial situation of any particular person. Prospective investors are advised to make their own assessment of the information contained herein and to obtain professional advice suitable to their own individual circumstances. WARNING: The information contained in this document is based on our understanding of current tax legislation and the current Revenue Commissioners interpretation thereof and is subject to change including retrospectively without notice. This is intended as a general guide only and is not a substitute for professional tax, legal and investment advice.