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HOW TO INVEST – Shares, Equities and Branch 23

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Equities, Luxembourg, US Estate Tax
This article is published on: 7th April 2021

07.04.21

This is the third and final in a series of articles where I have talked about holding stock options, vesting those options and holding them in a tax efficient manner. In this article, I will discuss the importance of de-risking and diversifying your portfolio, and finally how useful a Branch 23 solution is in mitigating against US Estate Tax on shares if you hold them.

WHY WOULD I WANT TO DE-RISK MY HOLDING?
I wrote in more detail about the effect of risk on your portfolio here. However, to explain briefly, it is considered risky, in investment terms, if you hold too much of one particular share or asset or if it makes up 100% of your investment strategy. Some people are perfectly comfortable with being exposed to this level of risk. Other people are less so. If you have 180,000€ in one particular share or equity, and that was all you had, then it might be a good idea to de-risk yourself and reduce the possibility of losing some, if not all of your investment due to market volatility.

WHAT IS THE ALTERNATIVE?
There are some alternatives available and they all centre on diversifying your holdings. If you have shares in a company, whether it be a start-up or a multinational organisation, you could benefit from diversification to insure against significant loss.

At Spectrum, we favour the multi-asset approach to investing for our clients. These investment vehicles allow our clients access to multiple funds, asset classes and locations through a single fund that is managed and monitored by dedicated specialists and experts on the investor’s behalf. This type of fund can increase the potential for diversification and reduce the level of risk.

USA Federal Bank

CAN I BE LIABLE TO US ESTATE TAX HOLDING SHARES?
Yes, you can. If you are a non-US person (neither a US citizen, US green card holder, or a long-term US resident) with US situs assets (including, but not limited to, real

property located in the US, shares of US publicly traded companies, shares of US private companies) you will be liable to US estate tax where the value of said assets is greater than $60,000. The tax rate ranges from 18% to 40%.

A Branch 23 solution could reduce or eliminate any US estate tax for non-US persons which would ordinarily be required upon your death if your US situs assets are worth more than $60,000. Whilst within the solution, there are generally no US income tax or capital gains tax implications for a non-US person. This means that you can hold the shares (should you wish to) for as long as you want, safe in the knowledge that when you pass away, your beneficiaries will not have to pay potentially significant tax liabilities.

Please note that US tax can be extremely complicated and it is advised that you also speak to a US tax specialist to ensure that you are in line with US tax rules.

Contact me to discuss this in more detail at emeka.ajogbe@spectrum-ifa.com or +32 494 90 71 72.

HOW TO INVEST – Stocks – They Don’t Have to be Taxing

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Equities, Investments, Luxembourg, Stock Markets, Stocks & Shares, Tax
This article is published on: 24th March 2021

24.03.21

In my previous article, I described what stock options are and how they can be utilised by both companies and individuals to create wealth. Now, I will look at some of the tax liabilities that you may be subject to and how you may be able to mitigate them when you decide to take up your option to purchase the stock. I will be focussing on the Belgian market, but we are also able to help if you are based in other countries, so do not hesitate to contact us with a specific enquiry.

HOW DO I ENSURE I AM NOT TAXED ON MY STOCK OPTIONS?
Short answer? You cannot. If the option is quoted on a stock exchange, the amount to be taxed is calculated on the basis of its closing price on the day immediately prior to the offer date. If the option is not quoted, then the amount to be taxed is 18% of the underlying share multiplied by the number of option rights held. As with all tax due in Belgium, these need to be reported to the tax authority.

WHAT WILL I BE TAXED AFTER I DECIDE TO TAKE UP MY OPTION?
At the time of writing, the Belgian rate of tax on stocks, shares and equities is 30% on the dividend income received; this tax is known as Withholding Tax. Companies that are established in Belgium are obligated to withhold this tax from investment income received.

If the dividends received into a Belgian bank account are coming from a foreign company, then the bank is obligated to apply the withholding tax. In addition, a withholding tax set at the rate set by the country the dividends are coming from must also be applied. This can be reduced if Belgium has a double taxation treaty with said country.

Let’s look at a quick example. A popular country of origin for stocks, shares or equities is the US. The US can charge a withholding tax of 30% on top of the Belgian withholding tax. Belgium retains a double taxation treaty with the US. This subsequently reduces the US withholding tax by up to half, whilst the Belgian withholding tax remains. On top of this, on January 1, 2018 the Belgian government introduced a withholding tax exemption threshold of up to €800 on dividends to encourage people to invest.

assurance vie

HOW DO I HOLD MY VESTED STOCK IN A TAX EFFICIENT MANNER?
I wrote an article on Branch 23, an investment bond solution available in Belgium for investors who wish to invest in a tax compliant way and also plan for inheritance and estate tax planning. Your stock, shares and equities can be held within this solution and you would not be liable to withholding tax on your investments for as long as you hold the bond. You will pay 2% Insurance Premium Tax when you initially invest and that covers your taxation liability (including Withholding Tax and Social Insurance Contribution that can add up to 59.58%) for however long you hold the bond.

To understand more how I can help you manage your stocks and shares/equities that you have accumulated in a more tax efficient manner, please contact me at emeka.ajogbe@spectrum-ifa.com or +32 494 90 71 72.

HOW TO INVEST – What are Stock Options?

By Emeka Ajogbe - Topics: Belgium, Investment Risk, Investments, Luxembourg, wealth management
This article is published on: 11th March 2021

11.03.21

More and more people are accumulating new wealth through gaining stock options as part of their remuneration package. Whether you are fortunate to work for one of the 40% of start-ups that become profitable or work for a large established corporation, the potential financial gain can be life changing. Today, I want to talk to you about stock options and why you should understand what they mean to you.

What are Stock Options?

WHAT ARE STOCK OPTIONS?
For any organisation you work for, you are likely to get a salary (unless you are volunteering) and, if you are lucky, stock options. Stock options make up a designated number of shares in a company and are designed to give you some measure of ownership in the organisation. They are the right, not obligation, to buy or sell a share at an agreed upon date and price (also known as the strike price). The idea being, if you own some of the company you are working for, then you are more committed to see the company grow, be profitable and stay with the company for a long time.

WHERE DO THEY COME FROM?
Stock options come from what is known as a stock option pool. These tend to be up to 20% of an organisation’s shares and these options are granted to employees and non-employees (typically investors). The initial owners start out with a certain number of shares in the company and effectively create new shares in the company by setting up a stock option pool.

HOW DOES THIS WORK?
This can be confusing, so for illustration purposes, I am going to use an example of a start-up called LIO that is today valued at 2,000,000€, has an initial share total of 5,000,000 and wants to create a stock option pool of 5% for its employees.

With the creation of a stock option pool, LIO now has 5,250,000 shares. Given that the value of the company is 2,000,000€, that means that each share is worth 0.3809€. Now, let’s say that LIO wishes to give an employee, Avery, 1% of the company’s shares as part of their remuneration package. This means that today, Avery’s 52,500 shares would be worth approximately 20,000€.

A few years into the future, LIO is bought and is valued at 20,000,000€. At this point, Avery decides to exercise his right to buy the shares. He would not have to pay the 3.809€ per share that they are now worth, but at the strike price of 0.3809€. Avery’s gain would be the difference between the two numbers multiplied by their shareholding, meaning that they would have made approximately 180,000€ thanks to the buyout.

I have oversimplified things for the sake of illustration. However, this is what happens in essence, even in large, publicly traded companies.

WHAT DO I DO IF I HAVE BOUGHT SHARES?
The technical term is vested. So, if you have done this and hold shares, then you may be liable to tax on those shares and we will see if we can work towards a solution for you. If you live in Belgium or Luxembourg, we can definitely help.

This article is intended for general guidance only and is based on our understanding of Belgian tax law. It does not constitute advice or a recommendation from The Spectrum IFA Group.

Is Financial Planning Different for Women?

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Financial Planning, Gender pay gap
This article is published on: 28th October 2019

28.10.19

In a recent global poll by UBS, they found that women are ‘acutely aware’ of their financial needs in the long term. The top three needs were identified as follows:

  • Retirement planning – 76%
  • Long term care – 72%
  • Insurance – 68%

Considering this, you would think that the figures would be similar for women taking the lead in managing their own long term financial planning; and you would be wrong. As, in the same report, only 23% took charge of long term financial planning, with 58% deferring to their spouse for criti-cal long term decisions.

Reading this report, I was not surprised. The majority of my clients are men or couples (where the man takes the lead on major financial decisions. However, he will defer to his wife for the house-hold budget), with single women (and I include those who are in relationships but not married) in the minority. The reasons for this range from the perceived understanding that men typically know more about investing, to women thinking they are bad investors. Let me tell you this, some of my best clients are women, as they are less likely to want to sell underperforming funds than men, and therefore are more likely to take advantage of compound interest.

Though it is easier said than done, women need to take a more active look at their own financial planning. The reasons being:

1. Women still live longer
On average, women tend to live four and a half years longer then men; this figure can widen when based on lifestyle and family history and therefore they have to put aside more for their retirement.

2. The earning gap
Whilst great steps have been made in shrinking the earnings gap in some fields, in other fields they have either stayed the same or even widening. Women are also more likely to work part time as well. This obviously means that women have less to put away for their retirement than men.

3. Career breaks
Women are more likely to take a career break than men – whether it is maternity leave or time off to take care of an elderly relative. The outcome is the same. Your earnings potential can be seve-rely affected.

4. Divorce
Regardless of what you may see in the media, on average, women are more severely impacted financially as a consequence of a divorce, than men. This may be a result of men either being the sole breadwinner, or earning significantly more than his wife.

5. Conservative Investors
When investing, women are more risk averse on what they do invest, than men. Potentially mis-sing out of greater gains.

6. Involvement in Financial Decisions
Research shows that when women are involved in financial decisions, 91% report that they are less stressed about their finances and an even larger amount report that less mistakes are made.

Clearly, having the confidence to speak to either your partner or a financial adviser about your fi-nancial planning can greatly alleviate the stress and confusing options that are ahead of you.

To discuss further how to start your financial planning, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72 to arrange a no obligation meeting

How to invest – Multi-asset Funds – Investing Made Simpler

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Investment Risk, Investments, multi assets
This article is published on: 16th October 2019

16.10.19

I have spoken about asset allocation and rebalancing and their affect on your investments. An-other strategy that is available to you is multi asset fund management.

You may have heard (read) that I have mentioned that here at The Spectrum IFA Group, we favour the ‘multi asset fund’ route of investing. But, what is that?

MULTI ASSET FUNDS

Multi asset funds provide you with access to multiple funds and asset classes through a single fund, managed and monitored by dedicated experts on your behalf. This type of fund can increase the potential for diversification and help reduce the overall level of risk.

Choosing the right funds and building a diversified portfolio can be extremely difficult. The options available to you are almost limitless, with tens of thousands available to investors in Europe alone.

Generally speaking, it is highly unlikely that a single fund manager is capable of delivering consis-tent outperformance, year on year. Making the right choice for a portfolio and then refining it and rebalancing it over the years takes time, information and skill. Therefore, fund managers need to be monitored to ensure they remain at the top of their game – and replaced when they are not. The resources and/or expertise to do this properly can be time consuming and expensive. There-fore, multi asset funds can play a valuable role in part or all of your investments.

All multi asset funds offer a convenient way to access a wide range of fund managers and asset classes. Spreading investments across a wide range of managers and assets reduces the proba-bility of a fall in value across the whole portfolio.

At the same time, multi asset funds that are designed to target different risk levels make it simple to adapt a portfolio to suit your changing circumstances. For example, if you have no need to ac-cess your savings any time soon, then you are likely to be able to take more risk than clients who are nearing the time when they do need to access their money.

How to invest – Rebalance Your Investments

By Emeka Ajogbe - Topics: Belgium, Branch 23 investments, Investment Risk, Investments, Netherlands
This article is published on: 9th October 2019

09.10.19

I previously discussed how asset allocation is an investment strategy that can limit your exposure to risk. As you get further along your journey of being an investor, you need to understand how to rebalance your portfolio to keep it in line with your investment objectives.

Rebalancing is bringing your portfolio back to your original asset allocation mix. This may be necessary because over time, some of your investments may become out of alignment with your investment objectives. By rebalancing, you will ensure that your portfolio has not become overexposed to one asset class and you will return your portfolio to a comfortable and more acceptable level of risk.

For example, let’s say that your risk tolerance determined that equities should represent 60% of your portfolio. However, after recent market fluctuations, equities now represent 75% of your portfolio. To re-establish your original asset allocation mix, you will either need to sell some of your funds or invest in other asset classes.

There are three ways you can rebalance your portfolio:

1. You can sell investments where your holdings are overexposed and use the proceeds to buy investments for other asset classes. With this strategy, you are essentially taking the profits that you have made and reinvesting it into a more cautious fund.

2. You can buy new investments for other asset categories.

3. If you are continuing to add to your investments, you can alter your contributions so that more goes to the other asset classes until your portfolio is back into balance.

Before we rebalance your portfolio, we would consider whether the method of rebalancing we agree to use would entail transaction fees or tax consequences for you.

Depending on who you speak to, some financial experts advise rebalancing at regular intervals, such as every six or 12 months. Others would recommend rebalancing when your holdings of an asset class increase or decrease more than a certain preset percentage. In either case, rebalancing tends to work best when done on a relatively infrequent basis.

Shifting money away from an asset class when it is doing well in favour of an asset category that is doing poorly may not be easy. But it can be a wise move. By cutting back on current strong performers and adding more under performers, rebalancing forces you to buy low and sell high.

To discuss further how rebalancing can help your existing investments, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

How to invest – What Is Asset Allocation?

By Emeka Ajogbe - Topics: Belgium, Netherlands
This article is published on: 30th September 2019

30.09.19

If you read my previous article, I discussed the importance of diversification in your portfolio and how it is a strategy that can limit your exposure to risk. Another strategy is through asset allocation.

Asset allocation involves dividing an investment portfolio among different asset categories, such as equities, bonds, property, commodities and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

asset classes

TIME HORIZON
Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. If you have a longer time horizon, you may feel more comfortable taking on a riskier or more volatile investment, because you can wait out slow economic cycles and the inevitable ups and downs of the markets. However, if you are saving for a property or a car, you are less likely to want to take on risk as you have a shorter time horizon.

TOLERATE RISK
I have spoken in more detail about risk, here. However, to summarise, risk tolerance is your ability and willingness to lose some (or all) of your original investment for greater potential returns. More adventurous clients, or those with a high tolerance for risk, are more likely to risk losing money in order to get better returns. My more cautious clients, or those with a low-risk tolerance for risk, are more likely to prefer investments that will preserve the value of their original investment.

THE IMPORTANCE OF ASSET ALLOCATION
By including asset categories with investment returns that move up and down under different market conditions within a portfolio, you can protect against significant losses. Historically, the returns of the three major asset classes (cash, equities and bonds) have not moved up and down at the same time. Market conditions that cause one asset class to do well often cause another asset class to have average or poor returns. By investing in more than one class, you will reduce the risk that you will lose money and your portfolio’s overall investment will have a smoother gradient. If the return in one asset class falls, you could be in a position to counteract your losses with better performance in another asset class.

If you are looking to start investing or review the asset allocation in your existing investments, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72

Pension Transfer from the EU Institutions

By Emeka Ajogbe - Topics: Belgium, EU Pension Transfer
This article is published on: 31st August 2019

31.08.19

The EU Pension Scheme is what is known as a defined benefit/final salary scheme. This means that when you retire, the organisation guarantees you a monthly payment (defined benefit) until you die. When you pass away, your partner will receive a reduced monthly payment, known as a Survivor’s Pension, until they die. It is an extremely good scheme, however, you only qualify for it if you have worked at the institutions for at least ten years (not necessarily continuously).

If you are coming or have come to the end of your contract, have worked there for less than ten years, then you will be entitled to transfer out your accumulated EU Pension Rights, or what is known as a severance grant. There are two very important reasons why you should take this with you when you leave:

1. You Will Lose It, Eventually
Let’s say that you have worked at the EU Institutions for about eight years and accumulated ap-proximately €200,000 in EU Pension Rights. The day you leave, that accumulated money will re-main there, only rising in line with inflation to keep the present value. You cannot add to it or in-vest it in funds that could possibly attract stronger growth. If you do leave it until your pension-able age (66 or more), in a strategy of ‘safekeeping’, then you will lose it completely. This is even more important to consider if you are not far from your pensionable age when you leave and do not have much time to protect your retirement. Therefore, it makes sense to transfer it as soon as you can, to maximise potential growth and protect your financial future.

An added benefit to this is that if you decide to return to the EU Institutions at some point, you can transfer your pension back in and (if you are there long enough), make up the ten years.

2. No Death Benefits
All pensions come with death benefits. This ensures that in the event of your passing, your bene-ficiaries, be they your spouse, children, or your extended family, will be provided with an income. In some cases, this sum can be greatly reduced, yet it will still be something. Unless you have worked for the qualifying ten years, your acquired EU Pension Rights is not a pension; it is a pot of money that you have accumulated through working at the EU Institutions. Therefore, it has no death benefits. In the event of your passing, your family will not benefit from what you have ac-cumulated and it will be absorbed back into the EU. By transferring it out, you ensure that the full amount of what is left (you may or may not have taken an income) is passed onto your beneficiar-ies to provide them with an income, and that the money is not lost.

What Are The Next Steps?
If this is something that you wish to consider, we will conduct an evaluation of your situation and the value of your pension rights at the EU. Once we have agreed and confirmed with you that transferring out is the right option, we will work with an approved provider who complies with the transfer out requirements, and who will help set up your new pension. Then, as part of our ongo-ing service, we will review your pension and personal circumstances every quarter to ensure that you are always updated with the latest information. Even if you move countries, our service will continue.

So, if you have come to the end of your contract at the EU Institutions, have less than 10 years of service and you don’t like losing large sums of money, wish to protect your financial future and potentially provide for your dependents/beneficiaries, then contact me either by email: emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

How to invest -The Importance of Diversification

By Emeka Ajogbe - Topics: Belgium, Investment Risk, Investments
This article is published on: 19th August 2019

19.08.19

There’s an old adage “Don’t put all your eggs in one basket”. I think about this every time I speak to a client about their portfolio. Often people wish to put their money into something familiar, like property. I remember in the early days of my career, I sat down with a property developer who had everything he had in his property portfolio of over a dozen properties, and all of his properties were in the same area of London. When I suggested that he needed to diversify because he was over exposed to the property market, he said that he had; that all the properties were not on the same road. When I checked the property addresses later, I realised that he was right, they weren’t. However, they were within ten minutes of each other!

This client had embarked upon a risky investment strategy as he was familiar with the asset class. Whilst he was having success with the returns, a sharp decline in the property market, particularly in the London area (which is what happened not too long after we spoke), would mean he would run into major financial difficulties. Enter, diversification.

Diversification is an investment strategy that reduces the risk that an investor is exposed to by allocating their funds into different financial instruments, industries, geographical areas and other categories. It aims to maximise returns by investing in different areas that would each react differently to the same occurrence.

Although it does not guarantee against investment loss, diversification is an important part of reaching long financial goals whilst minimising risk.

WHY SHOULD YOU DIVERSIFY
Let’s say, for example, that you are invested entirely in pharmaceuticals. It is announced one day that there will be a heavy levy against the pricing of drugs, which affects the costs that pharmaceuticals can spend on research and development. This would negatively affect the pharmaceutical industry, prices would fall and there would be a noticeable drop in the value of your portfolio.

However, suppose you have some of your portfolio invested in, say, technology. Strong performance in this industry, such as developments in cloud storage, could see the performance counteract the negative effects of the pharmaceutical industry on your portfolio. Even this small amount of diversification could protect the performance of your portfolio and ensure that all your eggs are not in one basket.

It therefore stands to reason that you would want to diversify as much as is feasible, while respecting your risk profile; across different industries, across different companies, across different asset classes. This will greatly reduce your portfolio’s sensitivity to market swings.

LOCATION, LOCATION, LOCATION
It pays to go global. As you can see in the table below, having funds spread across different locations can give you access to the best performing asset classes each and every year. One asset class can be the best one year, but is not necessarily top again the following year.

investment diversification

Diversification also means ensuring that your overall portfolio has exposure to various different investment styles. Some shares, known as growth shares, are held by investors as their value is expected to grow significantly over the long term. Others, known as value shares, are held because they are regarded as cheaper than the inherent worth of the companies which they represent. Value shares and growth shares can react differently in different economic environments.

Whilst it is possible in theory, in practice having a perfect balance between assets, sectors, markets and companies to suit an investment objective or risk profile is extremely difficult. However, the diversification qualities of collective investments schemes, along with the option of investing into multi asset funds can present the investor with a sound, individually tailored diversification solution.

At Spectrum, we favour the multi-asset approach to investing for our clients. These investment vehicles allow our clients access to multiple funds, asset classes and locations through a single fund that is managed and monitored by dedicated specialists and experts on the investor’s behalf. This type of fund can increase the potential for diversification and reduce the level of risk.

For more information on how understanding diversification can help you grow your wealth, please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

Understanding How Risk Affects Your Portfolio

By Emeka Ajogbe - Topics: Belgium, Investment Risk, Investments, wealth management
This article is published on: 11th June 2019

11.06.19

A crucial step to achieving long term financial security is recognising the importance of (and the relationship between) investment risk and return. In practice, this means implementing an investment strategy which matches your personal objectives and risk profile.

When I am speaking to clients about investing for the first time, they generally fall into two categories:

  • The Risk Averse
  • The Not So Risk Averse

Normally, within the first two to three years, one category changes their mind and changes to the other. Can you guess which one?

If you replied the risk averse becoming the not so risk averse, you would be right. This usually stems from clients becoming more comfortable with the idea of investing and the fact that taking risk can, when understood and applied properly, have a staggeringly positive effect on your portfolio.

There are many different reasons as to why people invest and no two people will have exactly the same objectives. Risk is a necessary and constant feature of investing – share prices fall, economic and political conditions fluctuate and companies can become insolvent. Therefore, understanding your risk profile is an important consideration before you actually invest.

Your risk profile is the relationship between your investment objective, risk tolerance and capacity for loss. As a result, you should be aware of your ability and willingness to accept risk and what level of risk might be required to meet your investment goals.

Investment profiles broadly fall into one of the following three categories:

Low Risk Profile
People with a low risk profile wish to preserve their capital and understand that there is very little scope for significant capital growth. These portfolios are heavily weighted to investing in cash and bonds.

Medium Risk Profile
People with a medium risk profile understand that to achieve long term capital growth, some degree of investment risk is necessary. Portfolios for this category of investor are usually balanced between cash, bonds and shares (equities)/equity funds, with perhaps some exposure to property as well.

High Risk Profile
People with a high risk profile are those who are prepared to accept the possibilty of a significant drop in their portfolio values in order to maximise long term investment returns. Higher risk portfolios have a far greater weighting towards equities/equity funds and less exposure to bonds and cash.

Different kinds of investment carry different levels of risk:

Cash
Cash or savings accounts are often regarded as ‘low risk’, yet, as the credit crisis of 2007 – 2008 showed, they are not ‘risk free’. Inflation will also reduce the value of cash savings if it is higher than the rate of interest being earned. At the time of writing, inflation in Belgium is just above 2% and the interest rate is 0%, which means that you are effectively paying your bank to hold your cash savings.

Bonds
Bonds or fixed interest securities are popular with many investors. If you invest in these instruments, you are essentially lending money to the issuer of the bond; usually a company or a government. In return, the issuer pays interest at regular intervals until the maturity date. The obvious benefit to the investor is regular income. However, there is a risk that the issuer may not be able to maintain interest payments and the capital value of the bond can fluctuate.

Shares
Although past performance is not a guide to future returns, historically the best long term investment performance is produced by equities or equity funds. The increased level of risk associated with equities is directly linked to the higher returns typically available from this type of asset.

The price of a company’s shares trading on a stock market is a reflection of the company’s value as influenced by the demand (or lack thereof) from investors. Essentially, when you invest in a company you are buying part of that company and hence able to share in its profits. The converse is also true, so you could be exposed to operating losses and a fall in the company’s share price. The risks, therefore, can be high, especially if you own shares in only one or a handful of companies. Equity funds, run by professional managers and which usually invest in a range of companies, are a means of avoiding such concentrated risk.

TYPES OF INVESTMENT RISKS

There are several types of investment risk that the you can be exposed to if and when you decide to invest, and you should be aware of the possible effect on your portfolio before you start:

Market Risk
Also known as systematic risk, it means that the overall performance of financial markets directly affects the returns from specific shares/equites. Therefore, the value of your shares may go up or down in response to changes in market conditions. The underlying reason for a change in market direction might include a political event, such as Brexit, government policy (consider current US-China trade tensions) or a natural disaster.

Unsystematic Risk
This refers to the uncertainty in a company or industry investment, and unlike market risk, unsystematic risk applies to only a small number of assets. For example, a change in management, an organisation making a product recall, a change in regulation that could negatively affect a organisation’s sales, or even a newcomer to market with the ability to take away market share from the organisation you are investing in.

Systemic Risk
This is the possibility that an event at company level has the potential to cause severe instability or collapse to an entire industry of economy. It was a major contributor to the financial crisis of 2007 – 2008. Think back and you will remember the phrase that Company X ‘was too big to fail’. If it collapsed, then other companies in the industry, or the economy itself, could fail too.

Currency Risk
Investment options include shares/equities in a range of currencies. Changes in exchange rates can result in unpredictable gains and losses when foreign investments are converted from the foreign currency back into your base currency, from US dollars into Euros for example.

Portfolio Construction Risk
This is the possibility that, in constructing a portfolio, you have an inappropriate income/growth split, or that you fail to monitor and manage the portfolio in line with your investment objectives. There is also a risk that you select assets that are inconsistent with your risk profile.

Interest Rate Risk
Interest rate risk is the possibility that an investment held will decline in value as a direct result of changes in interest rates. For example, bond prices are usually negatively affected by interest rate rises.

Concentration Risk
This is the possibility that you over-invest in a particular asset, sector, industry or region, which removes valuable diversifaction from your portfolio.

Opportunity Risk
This is the risk of being ‘under-exposed’ to other types of investments that could potentially deliver better returns.

Whether you are investing on a regular basis or have invested a lump sum, it is imperative to understand how risk, or your attitude to risk, can fundamentally affect the potential growth of your investment.