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.