The risks associated with investments

Investments involves risks

While investments can be profitable, they are also associated with risks. You could lose all or part of your initial investment. This page explains the risks associated with investments and how you can take them into account when making your investment decisions.

 

The main risks associated with investments

If you are aware of the risks associated with investments, you will be in a better position to decide which risks you are willing and able to run. 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.

 

Price risk

Price risk is related to the price of an investment product and means that the value of your investment could drop. This risk is different for the various types of investment and depends on factors such as:

  • the yield of the investment;
  • supply and demand for the investment;
  • changing investor moods (see also: market risk).

Market risk

Market risk is the risk of sharp increases or decreases on the market as a result of changing investor moods. This is also known as the ‘volatility’ of the market. The market is generally highly susceptible to mood changes. A positive mood can make investment prices rise, while a negative mood could cause them to drop.

 

Concentration risk

If you have just one or only a few different types of investment, you have what is known as a concentrated portfolio. If these investments don’t perform so well, you’ll have few to no other well-performing investments to compensate the losses.

Default or credit risk (for bonds)

Most bonds are issued by companies or governments. The issuing party is the debtor of a bond, and the likelihood of the debtor being able to pay interest and repay the bond amount at the end of the term is crucial. This is known as the debtor’s creditworthiness, which is expressed as a credit rating. The higher the credit rating, the lower the interest you will receive on the bond. Conversely, the lower the credit rating, the higher the interest will be. If a debtor’s credit rating drops, the bond price will usually drop too. Increases in the credit rating usually cause prices to rise.

Other risks associated with investments

 

Currency risk

If you have an investment product in a currency other than the euro, this other currency can present a risk, as its value may drop compared with the euro. This will also have an impact on the value of your investments in euros.

Interest risk

Interest is the price paid for borrowing money. Changes in the market interest rate can have an impact on things like share prices or fixed-rate bond prices. Interest risk is therefore also a price risk. In general:

  • If interest rates rise, share prices or fixed-rate bond prices will drop.
  • If interest rates drop, share prices or fixed-rate bond prices will rise.
 

Liquidity risk

Liquidity risk is the risk that it will be difficult for you to sell your investment, because there is little or no demand for it.

Political risk

Government measures or statements made by politicians can also have a negative impact on the value of your investments. This is known as political risk.

Inflation risk

Inflation is a decrease in the amount that you can buy for one euro. This means that the value of the euro has decreased, and the value of any investments you have in euros will therefore also have decreased.

Liquidity risk

Liquidity risk is the risk that it will be difficult for you to sell your investment, because there is little or no demand for it.

Political risk

Government measures or statements made by politicians can also have a negative impact on the value of your investments. This is known as political risk.

Inflation risk

Inflation is a decrease in the amount that you can buy for one euro. This means that the value of the euro has decreased, and the value of any investments you have in euros will therefore also have decreased.

 

Reinvestment risk

Reinvestment risk mainly applies to bonds. When you get the bond amount back at the end of the term, there is a risk that you will be unable to reinvest it in a bond with similar features, such as more or less the same credit rating, term and interest rate. 

Risk of unforeseen situations

Unforeseen situations include terror attacks and drastic changes to legislation. They can have a major impact on the price of your investments, even if your investments are very defensive (with little risk).

Specific risks

The Investment Appendix (Bijlage Beleggen) to the  Investment terms and conditions  (Voorwaarden Beleggen) tells you which specific risks apply to certain investment products.

Reinvestment risk

Reinvestment risk mainly applies to bonds. When you get the bond amount back at the end of the term, there is a risk that you will be unable to reinvest it in a bond with similar features, such as more or less the same credit rating, term and interest rate. 

Risk of unforeseen situations

Unforeseen situations include terror attacks and drastic changes to legislation. They can have a major impact on the price of your investments, even if your investments are very defensive (with little risk).

Specific risks

The Investment Appendix (Bijlage Beleggen) to the  Investment terms and conditions  (Voorwaarden Beleggen) tells you which specific risks apply to certain investment products.

How to reduce your risks

  1. Step 1 - Make sure you’re well prepared

    Before you start investing, make sure you don’t need the money for an extended period and decide whether you are prepared to take the risks involved. What are your investment goals and how important is it that you achieve them? Will you face major consequences if you don’t?

  2. Step 2 - Spread your investments

    Spreading your investments helps mitigate concentration risk. There are four types of asset you can invest in — shares, bonds, alternative investments and liquid assets. Spreading your investments across these four categories will go a long way in determining whether you can achieve your goal. Our Asset Management service lets you determine how much risk you want to run, while our asset managers will take care of ensuring your assets are spread effectively. If you choose the Guided Investing service, you will select a profile fund and the manager of that fund will spread your investments for you.

  3. Step 3 - Work on your knowledge and experience

    How much you know about investment and how much experience you already have are also important. You can only assess the risks of an investment type or product if you understand how it works. If you already invest and have ever been affected by a stock market crash, you will know you how respond in such a situation. Times like these are often when a risk suddenly becomes entirely clear.

  4. Step 4 - Take a careful look at complex products

    If you want to invest in a complex product, such as options or hedge funds, you should read the product’s Key Information Document (KID), which explains the features and risks of the product. Make sure you know this information and understand how the product works.

 

Our investment types and risk

Now that you know the main risks, you need to decide which ABN AMRO investment service is right for you, as this will affect your risk too. Be sure to base your choice on your investment knowledge and experience.

 

Self-directed Investing

Choose Self-directed Investing Basic or Self-directed Investing Plus if you want to do everything yourself: from gathering information and making investment decisions to submitting orders on Internet Banking or in the Mobile Banking app. We will not advise you on your investments, and this carries a risk. If you don’t know much about investments or don’t have much experience, you will need to make sure you are well prepared. 

Guided Investing

Choose Guided Investing if you want to invest independently with online support from us. We will gather investment information and put together your portfolio for you, while you will set your investment goal and choose from our six profile funds the one that is right for you. Profile funds ensure that your investments are spread effectively. You do not need to have investment knowledge yourself, as you will be able to tap into the extensive knowledge and experience of professional fund managers, who will monitor your chosen fund’s risks. You can keep track of your investments online, watching them develop towards your goal, and make changes whenever you want.

Asset Management

Choose Asset Management if you want to have your assets managed by our expert asset managers. Let them make all investment decisions for you, in line with your risk profile . Before getting started, they will discuss with you what they will be investing in, and this will be set out in an agreement. Our asset managers have a wealth of expertise and experience, making them the ideal people to monitor your investment risks.

Self-directed Investing

Choose Self-directed Investing Basic or Self-directed Investing Plus if you want to do everything yourself: from gathering information and making investment decisions to submitting orders on Internet Banking or in the Mobile Banking app. We will not advise you on your investments, and this carries a risk. If you don’t know much about investments or don’t have much experience, you will need to make sure you are well prepared. 

Guided Investing

Choose Guided Investing if you want to invest independently with online support from us. We will gather investment information and put together your portfolio for you, while you will set your investment goal and choose from our six profile funds the one that is right for you. Profile funds ensure that your investments are spread effectively. You do not need to have investment knowledge yourself, as you will be able to tap into the extensive knowledge and experience of professional fund managers, who will monitor your chosen fund’s risks. You can keep track of your investments online, watching them develop towards your goal, and make changes whenever you want.

Asset Management

Choose Asset Management if you want to have your assets managed by our expert asset managers. Let them make all investment decisions for you, in line with your risk profile . Before getting started, they will discuss with you what they will be investing in, and this will be set out in an agreement. Our asset managers have a wealth of expertise and experience, making them the ideal people to monitor your investment risks.