Carla Seely Column: Deciphering Investment Risk

[Written by Carla Seely]

Over the course of my twenty-year career in the international financial services industry, I have met many investors—and based on our conversations, I can confidently say that roughly half know what their money is invested in. What’s even more alarming is how limited many are in their understanding of the risks associated with their investments.

Risk, in general, is defined as the possibility of sustaining a temporary or permanent loss. This certainly applies in the world of investing—investments that are labelled “high risk”, for instance, have a significant possibility of experiencing large swings in their returns. In the simplest of terms, risk is a measure of whether or not a surprise will occur, either positive or negative.

Individual investors may have very different tolerances for risk, and their tolerances will change throughout their life. In general, if an investor needs cash within a short period of time, they should not put their money into higher-risk investments. However, an investor who can invest for the long-term without needing to access their money should seriously consider choosing the investments that offer the best possibility of generating positive results. A longer timeframe can offer an investment a chance to grow—and if any market ‘wobbles’ occur, they should be smoothed over by long-term investment gains.

As the most successful investors will tell you, diversification is key. Many investors understand the principles of diversification and risk well enough to know it is unwise to “put all of their eggs in one basket”. However, they may not always know how to avoid this in practice. A diversified investment portfolio not only reduces unwanted risk, it can contribute to long-term investment growth. It’s important to note that having a well-diversified portfolio does not necessarily mean a second investment; it means diversifying into different classes of assets.

As an investor, you should always do your homework and never invest in anything that you do not understand. This requires taking the time to learn and pay attention to events that might affect you. You work hard for your money, so it is equally important to work hard to understand how to make the most out of your investments.

Finally, it is imperative that you always read the fine print. Make sure to understand the restrictions and fees associated with your investments.

• Is there a minimum level at which you can invest?

• Is there a cost associated with buying into the fund [front-end load] or leaving the fund [back-end load]?

• Is there a minimum time commitment or “locked in” period?

• What is the penalty for making withdrawals outside of that timeframe?

• How will the investment adviser be compensated? Are they paid a salary, a commission or a combination of both?

There is no golden rule to investing; there are no right or wrong answers. The crucial questions you must always ask yourself are, “Do I understand what I am investing in?” and “Do I understand the
risks associated with my investment?”

- Carla Seely is the Vice President of Pension, Life and Investments at Freisenbruch-Meyer. If you would like any further details, please contact her at cseely@fmgroup.bm or call +1 441 297 8686.

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