Investment Management – Avoiding the risks
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 examine is the Liquidy Risk, the risk that you may be unable to buy or sell an asset due to the nature of the asset or the financial climate at the time. An example of this would be property. Property can be a good long term investment, but if the property market is depressed, like it is at the moment, you might have to sell at a lower price than you would during better times. 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 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 changes in currency exchange rates between different countries. This is a risk that is not easy to avoid as most FTSE 100 companies do not just trade in the UK but in many other countries. If you were considering moving or retiring to another country, you may want 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 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 considered. If an interest paying asset loses value due to interest rate changes. Some shares, like those of the banks tend to be sensitive to interest rate changes. You will know that cash investments like bank accounts are affected by interest rate fluctuations.
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.