Types of Risks 11686229

Risk is a part of investing. It’s important to understand what the risks are.

Like most people, you probably want to get the most from your investments without losing a good night’s sleep worrying about your investments. Regardless of where you invest, there’s always some kind of risk involved, and you need to be comfortable with your investment decisions.

When it comes to investing, the question isn’t whether to take risks. You can’t avoid them. That’s why you need to decide what kind of risk you are comfortable taking, and how you can manage it.

Inflation risk
Maybe you prefer putting your money in a savings account or a CD (certificate of deposit) because it feels safe. Believe it or not, both of these strategies could be pretty risky. There’s a chance your money may not be able to keep up with inflation. That means your dollar may be worth less in future years.

Principal risk
The money you invest is called your 'principal'. Unfortunately, you don’t always make money on what you’ve invested. In fact, you can even lose some or all of your principal. The chance that you may lose money is principal risk. This risk is commonly found with investments in stocks.

Credit risk
Think credit cards. When you borrow money you have to make payments plus interest to pay off your debt. The same holds true for companies that issue bonds (or IOUs) to the public. There’s a chance companies that issue bonds won’t be able to make interest payments or return all of your principal. That’s credit risk.

Liquidity risk
Let’s say you needed to buy a car or home, and you had to have the money tomorrow. If you couldn’t sell or redeem an investment quickly at a fair price to get the cash, it’s an indication that your investment has low liquidity.

Volatility risk
This risk encompasses all the other types of risk. The size and frequency of fluctuations in an investment’s price determines its volatility.

Market risk
The risk that debt service costs increase directly or the opportunity to reduce debt service costs is forgone as a result of movements in financial market prices.

There are a number of market risk factors of relevance to the management of the Australian government's debt portfolio:

  • domestic and foreign interest rate risks
  • exchange rate risk

*Please note this list is not intended to be exhaustive, if you have questions about risk and your Investments, talk to your financial adviser.

Investors should carefully consider the investment objectives, risks, charges and expenses. This and other important information is contained in the Prospectus, which can be obtained from your financial adviser and should be read carefully before investing.