Each type of investment has it’s own type of risk. There are a myriad of different types of investments but the main ones are Cash, Bonds, Equities (stocks and shares) and property.
Of the 4 main investment types, cash is considered to have the lowest degree of risk, particularly over the short term, as it is immediately liquid and does not present the risk of capital loss. However, cash does carry inflation risk which means that if the rate of interest being paid is lower than the escalation in the price of goods and services, the purchasing power of your cash is decreasing.
Bonds are effectively debt. Government bonds are commonly referred to as gilts or treasuries. When you buy a Government bond you are lending money to a Government in return for a fixed rate of interest. These are considered higher risk than cash but less risky than equities. Corporate Bonds work on the same principle but carry a higher degree of risk and therefore a higher fixed rate of interest. Bonds are subject to interest rate risk and inflation risk. If the interest rate rises then the face value of a bond will decrease and if the price of goods and services escalates above the fixed rate of interest then the real value of your investment will erode. If, for example, you bought a 10 year government bond during a low interest rate environment and sold it before its maturity date then you could suffer a significant capital loss.
Equities are effectively shares in a company and are considered to have the highest degree of risk, particularly short term risk. The degree of risk can vary dramatically with major market Blue Chip equities considered less risky than small cap emerging market equities. Equities are subject to a variety of risks with major market equities considered less risky than emerging market equities. The risks associated with investing in equities reduce over time and in general have the capacity to out perform cash and bonds over the longer term.
Commercial or buy to let property is an increasingly popular asset class as it is seen as being tangible and easy to understand. However this asset class has significant short term risk as it is not instantly tradable in the same way that cash, bonds and equities are and values can be eroded by increases in interest rates, rental voids, bad debts and cyclical downturns in value. The risks associated with property reduce over the longer term.
A key part of our financial planning process with you is to help you understand investment risk and to clearly establish your attitude to risk. We have developed our unique financial planning process specifically for International Expatriates and to conform to stringent regulatory requirements throughout the European Union.
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