It is often said that risk and reward go hand in hand, with a degree of risk being required to reap potential rewards. Investing involves the potential for both gains and losses and it is important to have a comprehensive understanding of the various types of investment risks that can affect your portfolio.
In this blog, we will look at some key types of investment risk to help navigate the investment landscape more effectively.
Inflation Risk
Inflation risk refers to the possibility that the purchasing power of your investments will decrease over time due to inflation. Inflation erodes the value of money, and if your investments don’t keep pace with inflation, the real value of your wealth diminishes. To mitigate inflation risk, it is important to consider investments that have the potential to outpace inflation, such as stocks and shares or inflation-protected bonds.
Capital Risk
Capital risk, also known as principal risk, is the potential for loss of the initial investment amount. This risk is particularly relevant when investing in assets such as stocks or bonds, where the value of the investment can fluctuate. Diversification, careful analysis of investment options, and a long-term perspective can help manage capital risk effectively.
Market Risk
Market risk refers to the possibility of your investments declining in value due to overall market conditions. Factors such as economic trends, political events, or market sentiment can affect the performance of your investments. It is crucial to diversify your portfolio across different asset classes and geographic regions to mitigate market risk. Regularly reviewing and rebalancing your portfolio can also help manage this risk.
Performance Risk
Performance risk arises from the potential underperformance of an investment compared to expectations or benchmarks. This risk can be influenced by factors such as economic conditions, industry-specific challenges, or poor management decisions. Conducting thorough research, analysing historical performance, and seeking professional advice can assist in managing performance risk.
Government Policy Risk
Government policy risk refers to the impact of changes in government regulations or policies on your investments. This risk can manifest through tax changes, alterations in interest rates, trade policies, or industry-specific regulations. Staying informed about current events, understanding the potential implications of policy changes, and diversifying across different sectors can help mitigate this risk. Ultimately, however, changes in policy can act as the single greatest to risk to a portfolio as there is very little either individual investors or advisers can do to control such decisions, and yet they can have a significant impact on an individual’s financial position, often with little notice.
Whilst many clients understand the basic concept of risk, it’s important to remember that certain risks will become more significant at various times due to external factors and market conditions. It is also important to re-evaluate your personal tolerance to risk throughout your investment journey as and when your own circumstances change.
Gresham Wealth Management work closely with clients to ensure they are aware of the various types of investment risks and how they can impact their portfolio. By understanding the various risks, clients can make informed investment decisions and work towards achieving their financial goals. Remember, risk cannot be eliminated, but with a well-diversified portfolio and a long-term perspective, it is possible to navigate the investment landscape with greater confidence.