21
February
2018

Investment Risks

The other investment risks

When people think about investment risk they are usually focussed on price volatility, this is the ups and downs in the investment value. This is only one of the risks we face as investors and, if we are investing for the long-term (more than 7 years), this arguably the least important of the risks we face.

The emphasized focus on price volatility risk can skew our investment choices and lead us to make decisions not in our best interests.  People are reluctant to invest in assets with high price volatility such as shares and are more inclined to invest in assets with low price volatility that may have other risks.

The least thought about risk is opportunity cost. This is most relevant to defensive assets such as cash and fixed interest. Although these investments are safe in nature, they also typically have much lower returns. By investing in these assets you forgo the potential for higher returns and, at the end of the investment period, may be significantly worse off in comparison to more aggressive options.

In many cases you will have no need for growth as you will have sufficient assets to meet your needs or a short investment horizon and an investment in defensive assets is probably perfect for your needs. In other cases investing for growth and accepting the associated risks would be much more beneficial.

Liquidity risk is also very important, and all assets have different liquidity characteristics. Investments like cash are at call and shares can usually be liquidated (with some risk and costs) quickly. Whereas superannuation requires specific conditions to be met to be able to access funds and investments like property are extremely difficult and expensive to liquidate.

Your individual situation and needs from the investment influences how important liquidity is for the investment. A stable financial situation coupled with a long-term outlook may make liquidity an unimportant consideration. In this case, the benefits of property or superannuation are very attractive despite the liquidity issues.

Interest rate risk is relevant to geared investments and should not be underestimated. Gearing is an excellent way to accelerate growth and, for many clients, is an excellent strategy. By far the most popular geared investment is property. However, people gear into other growth assets as well, products such a margin loans are popular for this strategy.

Increasing interest costs can dramatically affect cash flow and impact greatly on the effectiveness of the strategy. Property prices have recently risen dramatically, and we are seeing many investors with debts approaching $1 million. We also have record low interest rates. If interest rates increase this will make many investments unaffordable.

The key to investing is to manage risks based on your situation and have an investment strategy compatible with your situation and goals.

 

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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