Understanding risk
Before you decide to invest, you need to ask yourself how you would feel if your investment lost some value in the short-term. Investing is usually for the medium- to long-term so your investment has time to grow in value.
In general, the greater the potential return you want from your savings and investments, the greater the risk you have to take. It is important to talk to your financial advisor about the type of risk you are prepared to accept and what it will mean to the returns you can expect.
Main types of risk
- Inflation risk - the risk that your money will lose value or buying power over time. Even a modest inflation rate of 3% will mean that €100 will be worth only €97 after one year.
- Return risk - the risk that your savings or investments will not perform as well as hoped or expected. Most investments do not guarantee a set return, so you are exposed to return risk.
- Capital risk - the risk that you could lose all or part of your original investment. Most savings and deposit accounts are low-risk; investment products vary from medium to high in capital risk. Before you invest, you should ask about the risk to your capital (money) and consider how losing all or part of your money could affect you.
- Currency risk: You are exposed to a currency risk if you are investing in a different currency to your own local currency. So for example if you are investing euros into a US dollar denominated investment fund, the value of your investment will move up and down in line with currency changes.
You need to be comfortable that the level of risk you are taking suits your circumstances. You should not invest in a high-risk product if losing some or all of your money would seriously affect your financial situation.