Understanding investment risk
Before you decide to invest, consider how you would feel if your investment lost some of its value in the short term. Investing is usually for the medium to long-term so your investment has time to increase in value.
Usually, the greater return you want from your investments, the greater the risk you have to take. It’s important to talk to a financial adviser about the level of risk you are prepared to accept and what it will mean to the returns you can expect.
|Remember investments can go down as well as up.|
Main types of risk
There are several main types of risks with investments:
- Inflation risk – the risk that your investment will lose value or buying power over time. Even a modest inflation rate of 3% will mean that €100 will be worth only €97 after one year.
- Return risk – the risk that your savings or investments will not perform as well as hoped or expected. Most investments do not guarantee a set return, so you are exposed to return risk.
- Capital risk – the risk that you could lose all or part of your original investment. Before you invest, you should ask about the risk to your capital (money) and consider how losing all or part of your money could affect you. Most savings and deposit accounts are low-risk, investment products vary from medium to high risk.
- Currency risk: You are exposed to a currency risk if you are investing in a different currency to your own local currency. So for example, if you are investing euro into a US dollar investment fund, the value of your investment will move up and down in line with currency changes.
You need to be comfortable that the level of risk you are taking suits your circumstances. You should not invest in a high-risk product if losing some or all of your money would seriously affect your financial situation.