Overview of common investment risks in asset and wealth management:
Even the most careful people do make mistakes from time to time. A broad range of disasters can result from human error. Incomplete or incorrect completion of mandates to your asset manager or sending communications too late can have grave consequences for you as an investor. In investing, time is money, and getting the timing of a transaction wrong can earn or cost you a fortune.
Market rates can change at any time, and it is difficult if not impossible to accurately predict these changes. The risk is amplified by the fact that even local markets are influenced by macroeconomic fluctuations on a global level. Market risks can usually be divided into these categories: interest rate risks; currency-exchange and currency risks; commodity risks; stock risks; the added risks associated with alternative investments, structured products and derivatives.
Developments on a national and international level pose a constant threat to investors. The political and economic development of a country directly affects national markets and investments made in those markets via stocks, index funds and other financial instruments.
Investing in politically unstable countries involves higher levels of risk. Location-based risks also include transfer risks: changes to legal systems or political relations can make it impossible for you to transfer securities from a country in which you have invested to an exchange in another country, or to the country in which you reside.
Credit and counterparty risks
The terms “counterparty risk” and “issuer risk” refer to the risk that the creditworthiness of the entity buying from you or selling to you in a transaction will decline. In the worst case, the counter party may not follow through on their end of the bargain at all, either deliberately or because they are unable to.
The price of bonds, for example, can drop if the issuer’s creditworthiness declines. If the issuer becomes unable to make good on a bond (in the case of bankruptcy, for example), the bond may become worthless.
Market liquidity risks
A market becomes illiquid if demand for securities or other assets falls, or if the owners of certain securities refuse to sell. It can become very difficult to buy or sell all or even some of your assets in an illiquid market. This risk is most acute in alternative investments, real estate and private equity.