Why you need to know about investment risk
An overview of investment risk
Investing in unlisted companies, or start-up and smaller listed companies, especially those without a long term trading record, involves risk. You need to be aware you could lose some or all of the money you invest.
These investments can be exposed to a wide variety of risks, many of which can lead to sudden and large falls in value. The risk-reward ratio of investing in smaller companies is increased, as the risk of failure is higher. A well-diversified portfolio can help to mitigate this to some extent.
Do not invest unless you have fully established you can afford to lose this money, and that your chosen investments are right for you. If you have any doubts as to the suitability of a particular investment, or the asset class in general, or you require advice of any kind, you should obtain specialist financial and taxation advice from a professional adviser.
The service from goinvestments
- goinvestments provides a non-advisory service to High Net Worth Individuals and Sophisticated Investors.
- goinvestments neither gives investment advice or personal recommendations, nor does it promote any one investment over any other investment.
- The investment information displayed in the Investment Area is supplied by investment promoters, without amendment by goinvestments.
- If you have any questions about an investment, you can ask the investment promoter directly via the goinvestments website.
Investment risk considerations
The investments featured in the Investment Area are higher risk and generally considered to be long term in nature. Although some investments may have a fixed term, if the investment promoter is unable to liquidate sufficient funds at the maturity date, you may have to wait for the repayment of your capital. As a result, you should consider them as longer term investments, perhaps even beyond the contractual maturity date, and plan your finances accordingly.
Each investment listed in the Investment Area will feature the main risks associated with it, as indicated by the investment promoter. You should not rely solely on this information for it’s unlikely to be exhaustive. There will normally be other risks beyond those listed. You should always refer to the risk warnings and other information contained within the investment promoter’s prospectus, the information memorandum or other offer documents for the investment that you’re considering, as well as your independent due diligence investigations.
As the investment strategies adopted by different promoters, even in the same asset class, can vary considerably, you should pay careful attention to the approach adopted by your chosen investment promoter, to ensure it’s in line with your requirements.
As a lender to an investment company, or as a minority shareholder in an investment company, it’s unlikely you’ll have any influence over the company’s activities with regard to strategic decisions. You should be fully aware of any circumstances in which the nature of your investment might change, for this can dramatically alter the underlying risks of the investment: for example, the conversion of a debt-based instrument into equities which may be listed on a recognised stock exchange, or unlisted without the attendant regulatory oversight. Investment amendments can also result in a change of tax status which might have serious financial consequences: for example, a change in which a SIPP or SSAS investment is no longer compliant with pension legislation, resulting in penal tax charges from HMRC which could wipe out much of your fund value.
Diversification of your investment portfolio
Diversification is an essential part of investing. By spreading your money across multiple investments, you can reduce overall risk. That’s not just limited to investments featured within the Investment Area, but also across other asset classes too, in line with your attitude to risk and your capacity to loss.
As a general principle, you should invest relatively small amounts in a range of investment opportunities, rather than concentrating your investment in a small number of products or companies. By building a diversified portfolio, you spread risk and increase the chance of an overall return on your money.
You should invest only a limited proportion of your available investment funds in start-up and growth-stage companies, whether they are debt-based or equity-based. You should balance these investments with relatively safer, more liquid investments that offer a more predictable return.
Key points about investment risk
Past performance is not and never should be used as a guide to future performance.
Unless an investment is underwritten by the Government, there is always a risk to your invested capital.
The value of investments and the income from them can fluctuate and may fall. There is no certainty you will get back any part of your investment.
Investments in smaller companies will generally not be publicly traded or freely marketable. There will most likely be a big difference between the buying and the selling price. The price could be subject to rapid fluctuations in value.
The timing and price at which investment promoters may realise the underlying assets in order to repay your capital may be influenced by a large number of factors, some of which are specific to the investment, and others of which are extraneous.
The ability of the investment promoter to sell the underlying shares, or securities, or other assets will depend on there being a willing buyer at an acceptable price. Consequently, it might be difficult for your investment to be repaid on time, or at the level quoted at outset.
In the event that an investment promoter becomes unable to meet its debts as they fall due, or trading conditions change adversely, you may realise less than your original investment.
Although many asset backed investment promoters will employ the services of an independent security trustee in the event of a default, there's no guarantee there'll be sufficient assets to fully cover the liabilities. Furthermore, the costs associated with the work undertaken by a security trustee can significantly reduce the money available for repayment to investors.
Investments focused on property development can suffer all manner of risks: for example, planning issues, unexpected ground conditions and local environmental issues, cost overruns, construction delays, and more. Unless a significant contingency fund is built into the financial model, the investment could be at risk of failure.
Property investments focused on delivering interest, or dividends, as well as capital appreciation, through business trading, are reliant on meeting projected occupancy levels which cannot be guaranteed: for example, hotels, care homes, student accommdation, and more. It's important to ensure the financial projections set out in the investment documents are reasonable and achievable.
Many investment products featured in the Investment Area could be subject to special tax considerations: for example, investments approved for inclusion within a SIPP, SSAS or ISA tax wrapper. You should refer to the individual prospectus or other offer documents for specific taxation aspects of the chosen investment, and discuss the implications with your tax wrapper manager.
Tax wrapper approval is not an endorsement of the investment by the wrapper provider. It's simply confirmation the investment complies with the relevant legislation, and won't incur you in a taxation penalty.
Information supplied by the investment promoter will generally be based on assumed rates of tax applying at that date. Taxation types, levels and bases can change, and you should bear this in mind when you make your investment.
The tax treatment and eligibility for the tax reliefs of any investment product will depend on your individual circumstances, and the jurisdiction in which you pay tax.
If you are in any doubt about any tax aspect of your proposed investment, you should obtain specialist advice.
Charges and performance fees
You should take account of the charges levied by investment promoters: for example, performance fees, as these are likely to affect the net return of your investment.
Initial and other upfront charges, and on-going costs and performance fees will reduce the value of your investment. Some of these costs could be fixed in nature, so if the value of your investment is relatively small, you should be aware that fixed costs will have a greater impact on your overall net return.
Selling your investment
Many of the investments featured in the Investment Area are illiquid. They may not include the option to be sold prior to a fixed term maturity date.
If they are eligible for an early sale, there may not be a secondary market for them. Even if there is a secondary market, it could be restricted, especially if investment performance information affecting the price isn’t readily available. Consequently, these investments may be extremely difficult to realise at fair or market value, meaning you may have difficulty in obtaining a satisfactory sale price, if at all.
Prior to making an investment, it’s therefore important you fully understand all the early repayment options, and the at-maturity repayment options, together with the likelihood of them being delivered, to ensure you’re not left short of money at a time when you might need it.
The ultimate way to remove risk
For this, it's worth referring to Warren Buffett, regularly the world's richest man and one of the most successful investors of all time.
One of his more famous quotes is this:
"Never invest in a business you cannot understand."
So whether you're considering an investment in our Investment Area, or anywhere else for that matter, if you can't get to grips with how it works, or you can't explain how the returns will be delivered and how your investment will be repaid, arguably the right thing is not to invest!