Investment risks

Investing involves risks. Read more about investment risks and about what we do to mitigate these risks.
Investing is about risk and return. The higher the expected return on an investment, the greater the risk. Unforeseen situations such as economic crises and terrorist attacks can have a significant impact on returns. In an extremely negative scenario, you could even lose your entire investment.

Mitigating risks

  • Fair Capital Partners asset management seeks to reduce investment risks by:

  • analysing news about companies, countries and industries and incorporating the outcome of our analyses in our investment policy

  • adjusting the composition of your investment portfolio to expected economic developments

  • carefully diversifying your investment portfolio

An investment portfolio can consist of various asset classes: equities, bonds and liquid assets. The risk differs per asset class.

Risks per asset class

When buying equities, an investor is buying a stake in a company. The price of an equity, or share price, is driven by supply and demand on the stock exchange. Many companies pay dividends to their shareholders once or twice a year. The return investors can earn on equities consists of share price gains and dividends.

As the financial results of the companies in which you invest can vary greatly, the performance of the equities in your portfolio may also fluctuate strongly. Equities are a high-risk investment.

Bonds are debt securities issued by institutions, governments or companies. Each year, investors in bonds receive interest, the coupon rate (a bond’s coupon is the interest rate on the face value of the bond paid until maturity). This interest rate is fixed throughout the bond’s life. There is always a risk that the party borrowing the money (the issuer) will not pay the coupon or pay back the principal. The better the quality of the bond issuer, the lower the risk. Trading in bonds takes place on the stock exchange. This can influence bond prices. The market value of bonds can rise and fall, depending on interest rate developments. The return investors can earn on bonds consists of changes in the market price of a bond and its coupon.

Liquid assets include cash on hand and current account or savings account balances. The risk of investing in liquid assets is low. There is, however, a risk that the interest you receive on your liquid assets does not compensate for inflation and taxes.

The main risks of investing

Market risk

If stock market prices fall, the value of your investments will drop, and vice versa. This risk is mainly influenced by the global economy, such as economic growth or decline.

The risk of fluctuations in the price of your securities. Whatever instrument you invest in, you will always be exposed to price risks. To an extent, you can mitigate this risk by diversifying your investments.

Price risk

Credit risk

The risk that the country or organisation that has issued a bond cannot fulfil its payment obligations or is unable to pay back the principal of the loan. This is also known as default risk.
This risk applies mainly to bonds. If interest rates rise, bond prices fall, negatively affecting the value of the bonds in your portfolio. This is because if interest rates rise, bonds will enter the market with the same maturity as your bonds but at a higher interest rate, causing the demand for bonds to fall. Rising interest rates also tend to negatively affect share prices.

Interest rate risk

Concentration risk

The risk of a loss of value because a substantial part of a portfolio is concentrated in equities in a few companies, industries or regions, or in bonds issued by no more than a few countries. Developments such as a share price decline or bankruptcy will then have a much greater impact on your portfolio than when you diversify your investments.
You face this risk when you invest outside the eurozone. Fluctuations in the exchange rate of investments denominated in a foreign currency will affect the value of your portfolio, either positively or negatively.

Currency risk

Liquidity risk

The risk that you are unable to easily sell certain investments because there are few buyers. This risk is limited if you invest in listed equities or highly liquid government bonds.

The risk that you are unable to easily sell certain investments because there are few buyers. This risk is limited if you invest in listed equities or highly liquid government bonds.

Reinvestment risk