Knowing the Risks

To be a wise investor you need to be aware of the various types of risk associated with your investments.

Other than the risks of losing your job or getting sick there are a number of investment related risks you need to understand so that you can make more informed investment decisions.

With a little help from The Financial Planning Association we've prepared a list of the different types of investment risk you might encounter :

1. Inflation risk - Inflation can erode the real value of your investments. If the after tax return of your investment is less than the rate of inflation the real value of your money will decline. Don't rely solely on fixed interest investments - balance them out with growth investments like property and shares.

2. Mismatch risk - The investment you choose may not be suitable for your needs and circumstances. For example if your objective was to save as much as you can in twelve months then you should not enter into a fixed term investment.

3. Market risk - Movements in the market mean the value of your investment can go down as well as up - and sometimes suddenly. Different types of investments experience different levels of volatility. It's important to remember that markets go through regular ups and downs - so don't be tempted to sell the first time you experience a drop.

4. Market timing risk - Anticipating market rises and falls can be extremely difficult because no two economic cycles are the same. It's the time in the market that counts not necessarily the timing.

5. Risk of putting all your eggs in the one basket - All of your capital will be affected if your single investment does badly. Spreading your investments reduces your overall volatility.6. Liquidity risk - You not be able to access your money quickly or without cost when you want to. Always keep some funds aside in an easily accessible account that you can get at in case of an emergency.

7. Credit risk - Applies to debt-type investments such as term deposits. The institution you have invested with may not be able to make the required interest payments or repay your funds. Always ask about the company's credit rating, past performance etc. Remember Westpoint?