Types of risk

No matter what type of investments you make there is always some form of risk that you need to consider.

The following is a list of some of the risks that you may encounter:

Opportunity

The risk of losing the income or earnings you could have made on one investment because you did something else that wasn’t as profitable. An example of this might be if you bought an investment property in the wrong location and you miss out on the capital gain that you could have achieved if you had bought the property in a better location.

Market

The risk related to the overall market. If there is a significant market decline, then it is likely that there will also be a fall in the price of most stocks. Investors cannot manage market risk with diversification so need to understand the position of the market and avoid buying into a high-risk market.

Specific

The risk associated with an individual stock. Despite careful selection, unanticipated events may cause the stock price to fall after purchase. Investors manage specific risk by using diversification and by limiting the amount of capital invested in any one stock.

Legislative

The risk of the laws changing that may affect your investments. Particularly relevant to superannuation because the rules do change regularly. In general, the older you are, the less likely you are to be adversely affected by legislative changes.

Inflationary

The risk of the power of your dollar being less, or to put it another way, the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of your money. Inflation causes the value to decrease whether the money is invested or not, so it is a stealthy risk that can erode the value of a portfolio. Significant amounts of cash left in a cash account with a low interest rate would be an example.

Credit

The risk that a issuer of a debt instrument may not be able to make the capital repayment at the end of the period of investment or that they may default on interest payments.

Liquidity

The risk that you may not be able to sell the investment at short notice due to the illiquid nature of a particular investment. An example of this would be direct property.