Latest (3rd October 2022)

General risks

It’s important you understand the risk of investing, so speak to your Adviser if you are unsure as Touch does not provide investment or personal advice. Always read the Key Information Documents and Fund Fact sheets before investing. Tax rules can change, and their benefits depend on your circumstances.

Stock market investments are not guaranteed and fall in value as well as rise and you should only invest for the longer term (5+ years). Income and yields are variable and are not guaranteed. Past performance should not be seen as an indication of future performance.

There’s a chance you might get back less than you put in

Investing means that the value of your investments will go up and down depending on how well the underlying stock markets are doing:

If the stock markets go up then so will the value of your investment, If the stock markets crash, then the value of your investment will also likely fall

So, if you’re in the unfortunate position of needing to cash in your investments just after a crash, then you could get back less than you put in. This is very different to cash savings where you are guaranteed to at least get your money back with perhaps also some interest.

So why would anyone invest?

Over the longer term, the returns on investments are usually significantly higher than the rate of interest on cash.

Investing in Funds and Unit Trusts/OEICs

Two of the most popular types of fund are unit trusts and open-ended investment companies (OEICs); both are ‘open ended’ on the basis that the fund manager can create more units (like shares) at any time, many unit trusts have converted to OEICs due to their simplicity. The manager buys bonds or shares in companies on the stock market for the fund, the fund is split into units and this is what you (with other investors buy) to give you an stake in the fund and an affordable way to invest in lots of different asset classes.

In many ways unit trusts and OEICs are the same; they are open-ended and the price of each unit (unit trust) or share (OEIC) depends on the value of the fund’s underlying investment portfolio. The major difference between the two is that unit trusts quote a bid price (to sell) and an offer price (when you buy) with a spread that aims to ensure new or selling investors don’t dilute the value of existing investors’ units; OEICs only quote one price.

You can generally choose to have dividends paid to you as income or reinvested in the fund; both fund vehicles can invest in a wide range of asset classes, prices of Smaller Companies can be more volatile. This means that some funds are more risky than others, for example; Smaller Companies prices can be more volatile and there may be large differences between buying and selling prices and overseas investments can carry exchange rate risk, and may be based in less well regulated jurisdictions.

What sorts of risks could mean you lose some money when stock markets go up and down?

There are lots of factors affecting the performance of investments. The financial services industry tends to categorise them like this:

Systemic risks

Systemic risks are types of risks which affect almost all types of investment in the same way. For example, in a global financial crisis almost all types of investment will fall in value. Although this means they are particularly important risks because they cannot be eliminated by diversification. This means, they are impossible to avoid (unless you just don’t invest in the first place), the flip side is that you will usually be rewarded with higher returns over the long term.

Non-systemic risks

Non-systemic risks are types of risks that affect just one company or just a small segment of the market. Creating portfolios that are as diversified as possible is a good way to increase likely returns without taking more risk, so as not to put too many eggs in one basket.

Liquidity risks

Liquidity risk is the possibility that the market will ‘dry up’ for a particular type of investment meaning it effectively cannot be sold (other than at an unacceptably high loss). This can happen for example if there are many more sellers than buyers which forces funds to impose restrictions to prohibit investors from cashing in their investments.

Exchange rate risk

Exchange rate risk is the possibility that an investment in a foreign company drops in value due to the country’s currency falling dramatically.

Inflation risk

Inflation risk is the possibility that the rate of inflation will significantly exceed the rate of return on your investment. This would mean that the cost of living has increased so much that you have lost out overall, even though your investment has performed well in monetary terms.

Interest rate risk

Interest rate risk is the possibility that government and corporate bond investment types (which are traditionally seen as relatively low risk) will fall in value due to a sustained increase in interest rates.

Credit risk

Credit risk is the possibility that government or corporate bond investments types (which are traditionally seen as relatively low risk) will fall in value due to the organisation that issued the bond becoming more likely to go bankrupt.

Social, political and legislative risk is a broad category of risk meaning the possibility of investments falling in value due to a sovereign power changing the rules in some way. This could be anything from the relatively benign (eg changes to the rate of tax) to a national or international crisis, such as Coronavirus.