A guide to the main types of investment risk

The risk that inflation reduces the purchasing power of your capital and/or income. If the return on your investment is less than the inflation rate over the term of your investment, the value of your investment will fall in real terms.

Most relevant to cash deposits and bonds, this is the risk that your investment will lose money because interest rates move up or down. For example, if your cash deposit is earning a fixed 3% interest over five years, but the market interest rate moves up to 5% during this period you would lose potential earnings. You could also lose out if your investment isn’t earning a fixed rate of interest and interest rates then fall.

The risk of investing in specific markets, such as the property market or stock market. Events that often cannot be predicted can cause prices to fall suddenly in a particular market and significantly affect the value of your investment.

Most investors are aware of the phrase ‘don’t put all your eggs in one basket’. You can reduce this risk by spreading your investments widely across a variety of asset types. The downside to this is that above average performance in one asset can be diluted by poorer performance in another.

Similar to diversification risk, this is where investors face extra risk by concentrating too much or all of their capital in just one or a small number of stocks, which may be influenced by specific conditions that might not apply to the broader market in general.

The risk that the bank or building society holding your capital fails.

The risk that the other party in an agreement will default, for example, the provider of an investment product.

Usually associated with investments in the Bonds asset class such as government or corporate debt. This is the risk that the issuer fails to keep up interest payments to investors or fails to repay the capital at the end of the term.

Closely linked to default risk, where an issuer may not default but there is speculation or a perception that they might. This can lead to a fall in the value of the investments.

Investments in overseas assets can be affected by movements in exchange rates. Even if an asset performs well, investors could see the value of their investment fall when it’s converted back into Sterling.

The risk of not being able to cash in your investment as quickly as you would like or at the price you might expect.

 

Important information

The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.

For access to advice from a Private Banking and Advice Manager, you’ll need at least £250,000 in savings, investments and/or personal pensions and/or a sole annual income of at least £250,000.
Find out more about eligibility and fees

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