While investing can be profitable, it also involves risk. You could lose all or part of your initial investment. This page explains the various risks associated with investments and how you can take them into account when making your investment decisions.
Before you start investing, you need to decide whether you can spare the money for a long period of time, and if you’re prepared to take risks. What are your investment goals? How important is it that you achieve these goals with your investments? Will there be serious implications if you don’t achieve these goals?
You can limit the concentration risk by spreading your investments. For the purposes of investing, we make a distinction between four asset categories: shares, bonds, alternative investments and liquid assets. Spreading your investments across these four asset categories is one of the main ways of ensuring that you achieve your investment goal. With Portfolio Management, you choose the risk level and our portfolio managers will ensure a good investment spread. If you opt for Guided Investing, you choose a profile fund and the manager of that fund will spread your investments for you.
Your level of knowledge and experience of investing also plays an important role. You can only assess the risks of your type of investment and your investment products if you understand how investing works. If you already have some investments and have experienced a significant drop on the stock market, you probably know how you’ll respond. You only really feel the risk you’re taking when the stock market goes through a bad spell.
If you’re thinking about investing in a complex product like bonds or hedge funds, be sure to read up on the product first. Every complex product has a Key Information Document (KID) explaining the features and risks of the product concerned. Make sure that you’re aware of the features and risks of that product and that you understand how it works.
Most investors have heard of price risk, market risk, concentration risk and credit risk, but there are some other risks that you need to be aware of too.
This refers to the price of an investment product. Price risk is the risk of the value of your investment dropping. This risk varies per investment and depends on:
Market risk is the risk of the market rising or falling due to mood swings among investors. This is also known as the volatility of the market. The market is generally very sensitive to mood swings. The value of your investments will rise if the mood is positive, but a negative mood will cause the value to drop.
If you invest in just one or a few investments, this is known as a concentrated portfolio. If these investments are not doing well, you may have little or no opportunity to absorb losses on them through other investments that are proving profitable.
Most bonds are issued by companies or governments, which are then the debtor for the bond. Whether the debtor is expected to be able to pay the interest and repay the principal sum at the end of the term plays an important role in bonds. This is known as the debtor's credit rating. The higher the credit rating, the lower the interest that you earn on the bond. And the lower the credit rating, the higher your interest will be. If a debtor’s credit rating drops, the value of the bond will usually drop in response. If their credit rating rises, the price will rise too.
If you have an investment product issued in a currency other than euros, you run a risk of the other currency rising or falling against the euro. This has a knock-on effect for the value of your investment in euros.
The interest rate is the price you pay for borrowing money. If the market interest rate changes, this may affect the price of shares, for example, or bonds with a fixed interest rate. This is why the interest rate risk is also a price risk. As a rule:
This describes the risk of having difficulty selling your investment because there is little or no demand for the product.
Government measures or political statements can have a negative effect on the value of your investments. This is known as a political risk.
Inflation means a decline in what you buy for €1. The value of your investments (in euros) will drop in response to a drop in the value of the euro.
This mainly applies to bonds. When a bond ends and your investment is paid back to you, there’s a risk that you will not be able to invest in another bond with similar features. Similar features include the same or almost the same credit rating, term, interest rate, etc.
This refers to events such as a terrorist attack, or far-reaching changes to legislation. Unforeseen circumstances can have a huge impact on the price of your investments, even if you have a very defensive investment portfolio (with little risk).
If you have bonds and structured products, you must be aware of the possibility of a 'bail-in' under the European Bank Recovery and Resolution Directive (BRRD). The government can decide on a 'bail-in' if it wants to save a bank from the threat of bankruptcy, for example. This means that the bank in question must wholly or partially postpone or even stop paying interest and repayment on the bonds or structured products it has issued. But even if the bank avoids bankruptcy, as an investor you may still lose some of your right to repayment of the principal amount. By instigating a 'bail-in', the government needs to fork out less (or no) taxpayer money to prevent the bank from going bankrupt. In European countries, it is usually the central banks that implement a bail-in; in the case of the Netherlands, this is De Nederlandsche Bank. A lot of non-European countries have a similar arrangement.
You are now aware of the main risks. However, how you choose to invest with ABN AMRO also affects your risk. Therefore, select the investment type that suits you best, based on your knowledge of, and experience with, investing.
Do you want to invest but have little time or knowledge? We assist you in choosing your goal, how long you want to invest, and the level of risk you are willing to take.
Do you want to decide for yourself what to invest in? At ABN AMRO, you can choose from two investment types: Self-directed Investing Basic and Self-directed Investing Plus.
Do you want to invest a part of your money but prefer to leave it to the experts? Your asset manager will guide you with every decision you make.
Find the answers to frequently asked questions about investing on our service page.
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