WHAT IS RISK?

Risk is the potential that a chosen action or activity (including not taking any action) will lead to a loss. Potential losses themselves may also be called 'risks'.

Every investment — even cash — carries a different level of risk, and there is a direct relationship between risk and return. Higher risk investments are likely to have greater potential rewards, but there is also an increased likelihood the value of the investment could fall or it could fail altogether.

WHAT'S YOUR ORGANISATION'S CAPACITY FOR LOSS?

Capacity for loss refers to your charity’s ability to absorb falls in the value of your investment. If any loss of capital would affect the operation of your charity, this should be taken into account when assessing the risk you’re able to take.

The capacity for loss you’re prepared to take in order to achieve your charity’s investment objectives is defined by two things:

  • Your attitude to risk, which is the level of risk you view as being acceptable in order to achieve a certain return.
  • Your capacity for risk which is based on quantifiable financial factors, such as the proposed length of time you will hold the investment and the income level you are hoping to achieve.

TYPES OF INVESTMENT RISK

There are many different types of risk that might impact on the value of your investment. Risk can be associated with:

  • lenders
  • market changes
  • political or economic changes
  • non-diversification

It may not always be possible to anticipate or avoid these, but generally you may be able to reduce the impact through diversification.

Managing risk in your investment portfolio isn’t just about deciding on the level of risk you’re willing to take on; it’s also about understanding the types of risk you might face. These can include:

Capital risk

Investing in ‘risk’ assets, such as equities, where you could lose some — or all — of the money you invested in the first place. There are even some complex investments that might lose you more than the amount you put in them.

Market risk

Even if you invest in a company that’s performing well, a dip that affects the wider market can also affect the value of your investment.

Currency risk

If you invest in shares of a company that’s headquartered abroad, exchange rates could reduce the money you get when you sell your charity’s investment.

Sector risk

Concentrating too much of your portfolio in one sector — like health care or information technology — could reduce your returns as a downturn in that sector is likely to affect all the companies within it.

Specific risk

This is the risk of the specific company you’ve invested in performing poorly.

Manager risk

If you choose to invest through an actively managed investment fund, a manager will aim to predict the market and adjust the investments accordingly. An index tracking manager may very accurately mirror the market, or they may not. This means it makes sense to do your research on managers before choosing a fund.

Inflation risk

A rise in inflation will reduce the value of your charity’s savings over time. To protect against the impact of inflation, some investors might choose to buy other investments instead of, or as well as, holding cash.

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Want to find out more?

OUR GUIDE TO INVESTMENTS

Whatever your appetite for risk, our guide to investments can help you to understand the different types of risk, and help you decide the level of risk your organisation is comfortable with.

Download our guide to getting started
CAF Financial Solutions Limited (CFSL) is authorised and regulated by the Financial Conduct Authority under registration number 189450. Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA. CFSL is a subsidiary of Charities Aid Foundation (registered charity number 268369).

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