One of the most important roles of a financial professional working in investment management is to manage and mittigate the risks involved with a client’s investments. There are various different types of risks that your adviser will examine before making a report and whilst managing your investments.
Avoiding any risk at all is practically impossible, but having a basic knowledge of all the aspects involved will help you see what your financial adviser is looking at and assist you both make the best decisions. Most of the due diligence involved in investment management is carried out with research and analysing statistics.
One of the first things to look at is the Liquidy Risk, the risk that you may not be able to buy or sell an asset due to the nature of the asset or the market at the time. A good example of this would be property. Property investment can be a good long term investment, but if the property market is depressed, like in the current economic climate, you may have to sell at a lower price at the moment than you would during better times. A good risk in terms of liquidity often comes from assets such as large company shares or government bonds.
Income and Capital Risk – this is the risk that the income generated from your investment may not be sufficient for your needs, for instance, the investment does not match your liability when paying off an interest only mortgage.
Currency Risk is the risk to any potential returns that are affected by the fluctuations of currency exchange rates between different countries. This is a risk that is difficult to avoid as most UK FTSE 100 companies don’t just trade in the UK but in many countries. If you were thinking about moving or retiring to another country, you might want to consider taking the investment in the currency of that particular country thereby minimising the potential currency fluctuations when you need to draw on the funds.
The risk of inflation is another obstacle that is hard to avoid although some investment products do link their income to inflation. Commodities and shares are quite often a good hedge against inflationary risk.
Another risk to be aware of is the Counter party risk, where a third party, such as a bank fails to fulfil its requirements – the Lehman collapse is an example you may recall. Research using credit ratings can be useful to mitigate this but unfortunately this is not an exact science.
Interest rate risks have to be thought about. If an interest paying asset loses value due to interest rate fluctuations. Some shares, like those of the banks tend to be sensitive to interest rate changes. You will be aware that cash investments such as bank accounts are affected by interest rate movements.
These are just a few of the things that your financial adviser will examine before advising you on the best investment strategies for your own specific circumstances. The process is quite complex but after all the plan is to help you manage the risks with your investments and the goal is to provide you with better investment returns in the long term.
Want to find out more about Investment Management, then visit Heartwood Wealth Management for more information.