All investments – including saving in a cash deposit – carry some form of risk. It’s important to know what these risks are before you invest. Speak to a financial adviser to see which risks apply to your chosen investments and what level of risk is suitable for you.
Any investment that is traded on a market, including shares, bonds, property and commodities, can fall as well as rise in value, depending on investor demand. If an investment falls in value, there is a risk you may not get back the full amount you originally invested.
The income paid out by many investments is not guaranteed and may fluctuate. In some years, investments like shares may pay no income at all if a company chooses not to pay out a dividend. For this reason, stock-based based investments should only be used to provide a retirement income if you can tolerate some uncertainty.
3. Foreign exchange
If you hold investments denominated in overseas currencies – either directly or through an investment fund – you can see your returns reduced if those currencies weaken in value against sterling. On the other hand, if currencies are strong against sterling, returns can increase when converted back into British pounds.
4. Interest rates
Bonds which pay a fixed income, such as government gilts, are sensitive to changes in interest rates. If interest rates rise, bonds can see their market price fall because their fixed income payment looks less valuable, which can create losses for investors who choose to sell. But if rates fall, the value of a bond can rise.
5. Credit quality
Bonds are also exposed to credit risk. If the creditworthiness of the issuing company or government (and therefore its ability to meet the promised payments on a bond) deteriorates, the value of a bond can fall.
Inflation is the trend for the price of goods and services to rise over time. If the return on an investment or savings deposit fails to keep pace this cost of living, your money will see its purchasing power, or ‘real’ value, decline.
7. Emerging markets
Young, developing markets, such as those in Asia, Eastern Europe and Latin America, are often considered to carry higher levels of political and currency risk than mature markets such as the US, UK or Germany. This means their stock markets can be more volatile and are best considered a long-term investment within a well-diversified portfolio.
Certain investments are considered to be illiquid, which means they cannot always be sold quickly. If you want to get your money out of an illiquid investment you must be prepared to wait. For this reason, illiquid assets like commercial property, are only suitable for investors who can take a long-term view.
9. Fund manager skill
Some investment funds rely on the skills of a single fund manager or a small team of managers. If that manager or team leaves, performance of the fund may be affected. Equally, an investment approach that performs well in some markets may not do well in all – so investors need to be prepared for performance to fluctuate.
The tax treatment of investment wrappers like pensions and individual savings accounts, as well as personal tax allowances, is subject to change by governments and investments that offer generous tax breaks now may not necessarily do so in the future. The tax rules can affect what your savings and investments will ultimately give you.
The charges on investment funds, pensions and other investment products are also subject to change. Charges will affect investment growth and what you ultimately get back from your investments so it’s important to understand what their impact on investment performance will be.
12. Investor protection
If an investment or deposit account is not covered under the UK’s Financial Services Compensation Scheme (FSCS), you may have no redress if the provider falls into financial difficulties. For this reason, you may wish to check whether your chosen investments are protected – particularly where an investment fund or scheme is domiciled outside the UK. All deposit-takers featured in the James Hay Investment Centre are covered by the FSCS.