One of the main roles of a financial adviser involved in investment management is to manage and evaluate the risks involved with their client's investments. There are a number of different types of risk that your financial planner will evaluate prior to making and whilst managing an investment.
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 check is the Liquidy Risk, that is the risk that you may be unable to buy or sell an asset because of the nature of the asset or the financial environment at the time. An instance of this would be property. Property is often a good long term investment, but if the property market is depressed, as it is currently, you might have to sell at a lower selling price than you would normally. A good risk in terms of liquidity often comes from assets such as larger company shares or government issued bonds.
Income and Capital Risk - this is the risk that the income generated any investment you might have may not be enough for your needs, eg. the investment does not match your liability when repaying an interest only mortgage.
Currency Risk is the risk to any possible returns that are affected by the changes in currency exchange rates in between different countries. This is a risk that is not easy to escape as most FTSE 100 companies do not trade solely in the UK but in many other countries as well. If you were considering moving or retiring to another country, you may wish to think about taking the investment in the currency of the country you are planning on moving too thereby minimising the potential currency problems when you need to access your investment.
The risk of inflation is another problem 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 inflation.
Another risk to be aware of is the Counter party risk, where a third party, such as a bank fails to fulfil its obligations - the Lehman collapse is an event you may recall. Research using credit ratings may be useful to mitigate this but unfortunately is not always the answer.
Interest rate risks have to be examined. That is if an interest paying asset loses value due to interest rate movements. 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 planner will be looking at before advising on the most suitable investment strategy for your particular circumstances and the process can be quite complex, after all the plan is to help you manage the risks with your investments and the aim is to provide you with better returns in the long term.
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 check is the Liquidy Risk, that is the risk that you may be unable to buy or sell an asset because of the nature of the asset or the financial environment at the time. An instance of this would be property. Property is often a good long term investment, but if the property market is depressed, as it is currently, you might have to sell at a lower selling price than you would normally. A good risk in terms of liquidity often comes from assets such as larger company shares or government issued bonds.
Income and Capital Risk - this is the risk that the income generated any investment you might have may not be enough for your needs, eg. the investment does not match your liability when repaying an interest only mortgage.
Currency Risk is the risk to any possible returns that are affected by the changes in currency exchange rates in between different countries. This is a risk that is not easy to escape as most FTSE 100 companies do not trade solely in the UK but in many other countries as well. If you were considering moving or retiring to another country, you may wish to think about taking the investment in the currency of the country you are planning on moving too thereby minimising the potential currency problems when you need to access your investment.
The risk of inflation is another problem 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 inflation.
Another risk to be aware of is the Counter party risk, where a third party, such as a bank fails to fulfil its obligations - the Lehman collapse is an event you may recall. Research using credit ratings may be useful to mitigate this but unfortunately is not always the answer.
Interest rate risks have to be examined. That is if an interest paying asset loses value due to interest rate movements. 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 planner will be looking at before advising on the most suitable investment strategy for your particular circumstances and the process can be quite complex, after all the plan is to help you manage the risks with your investments and the aim is to provide you with better returns in the long term.
About the Author:
To find out more about Investment Management, please visit Heartwood Wealth Management for information and guidance.
No comments:
Post a Comment