Risks of investing
Investments involves risks
Investing can be profitable, but it also involves risk. You could lose all or part of your initial investment. We explain the risks involved and how you can take them into account.
Important to bear in mind before you start investing
- Be aware of the risks and don't get caught up in hustle and bustle of the day.
- Only invest money you can spare. Maintain a buffer for unforeseen circumstances.
- Remember to put some extra money aside for a rainy day.
- Consider your horizon, i.e. how long you want to invest for, and choose the risk you are willing to take accordingly.
- Stagger your initial investment over a certain period; the stock market is difficult to predict. Avoid speculating.
- Choose Self-Directed Investing Basic or Self-Directed Investing Plus and spread your investments. Never invest in just one specific share or shares from a single industry or country. Invest in investment funds, for example.
What can you do to reduce your risk?
Make sure you’re well prepared
Before you start investing, you need to decide whether you can spare the money for a long period of time, and if you’re prepared to take risks. Ask yourself these questions:
- What are my investment goals?
- How important is it that I achieve these goals with my investments?
- Will there be serious implications if I don’t achieve these goals?
Make sure you spread your investments
You can limit the concentration risk by spreading your investments. There are four asset categories in investing: shares, bonds, alternative investments and liquid assets. Spreading your investments across these four asset categories is one of the main ways of ensuring that you achieve your investment goal.
With Portfolio Management, you choose the risk level and our portfolio managers will ensure a good investment spread. If you opt for Guided Investing, you choose a profile fund and the manager of that fund will spread your investments for you.
Acquire some knowledge and experience
How much do you know about investing? You can only assess the risks of your type of investment and your investment products if you understand how investing works. If you already have some investments and have experienced a significant drop on the stock market, you probably know how you’ll respond. You only really feel the risk you’re taking on those moments.
Beware of complex products
If you’re thinking about investing in a complex product like bonds or hedge funds, be sure to read up on the product first. Each complex product has a Key Information Document (KID) explaining the features and risks involved. Make sure you understand these.
What are the specific risks involved in investing?
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
This refers to the price of an investment product. Price risk is the risk of the value of your investment dropping. This risk varies per investment and depends on:
- the returns from the investment itself
- supply and demand for the investment
- mood swings among investors (see also: market risk).
Market risk
Market risk is the risk of the market rising or falling due to mood swings among investors. This is also known as the volatility of the market. The market is generally very sensitive to mood swings. The value of your investments will rise if the mood is positive, but a negative mood will cause the value to drop.
Concentration risk
If you invest in just one or a few investments, this is known as a concentrated portfolio. If these investments are not doing well, you may have little or no opportunity to absorb losses on them through other investments that are proving profitable.
Default or credit risk (bonds)
Most bonds are issued by companies or governments, which are then the debtor for the bond. Whether the debtor is expected to be able to pay the interest and repay the principal sum at the end of the term plays an important role in bonds. This is known as the debtor's credit rating. The higher the credit rating, the lower the interest that you earn on the bond. And the lower the credit rating, the higher your interest will be. If a debtor’s credit rating drops, the value of the bond will usually drop in response. If their credit rating rises, the price will rise too.
Other investment risks
Currency risk
If you have an investment product issued in a currency other than euros, you run a risk of the other currency rising or falling against the euro. This has a knock-on effect for the value of your investment in euros.
Interest rate risk
The interest rate is the price you pay for borrowing money. If the market interest rate changes, this may affect the price of shares, for example, or bonds with a fixed interest rate. This is why the interest rate risk is also a price risk. As a rule:
- If interest rates go up, the price of shares and bonds with a fixed interest rate will drop.
- If interest rates drop, the price of shares and bonds with a fixed interest rate will rise.
Liquidity risk
This describes the risk of having difficulty selling your investment because there is little or no demand for the product.
Political risk
Government measures or political statements can have a negative effect on the value of your investments. This is known as a political risk.
Inflation risk
Inflation means a decline in what you buy for €1. The value of your investments (in euros) will drop in response to a drop in the value of the euro.
Reinvestment risk
This mainly applies to bonds. When a bond ends and your investment is paid back to you, there’s a risk that you will not be able to invest in another bond with similar features. Similar features include the same or almost the same credit rating, term, interest rate, etc.
The risk of unforeseen circumstances
This refers to events such as a terrorist attack, or far-reaching changes to legislation. Unforeseen circumstances can have a huge impact on the price of your investments, even if you have a very defensive investment portfolio (with little risk).
Bail-in risk
If you have bonds and structured products, you must be aware of the possibility of a 'bail-in' under the European Bank Recovery and Resolution Directive (BRRD). The government can decide on a 'bail-in' if it wants to save a bank from the threat of bankruptcy, for example. This means that the bank in question must wholly or partially postpone or even stop paying interest and repayment on the bonds or structured products it has issued. But even if the bank avoids bankruptcy, as an investor you may still lose some of your right to repayment of the principal amount. By instigating a 'bail-in', the government needs to fork out less (or no) taxpayer money to prevent the bank from going bankrupt. In European countries, it is usually the central banks that implement a bail-in; in the case of the Netherlands, this is De Nederlandsche Bank. A lot of non-European countries have a similar arrangement.
Our investment types and risk
You are now aware of the main risks. However, how you choose to invest with ABN AMRO also affects your risk. Therefore, select the investment type that suits you best, based on your knowledge of, and experience with, investing.
Compare the investment types
Guided Investing
Do you want to invest but have little time or knowledge? We assist you in choosing your goal, how long you want to invest, and the level of risk you are willing to take.
- Online guidance at the start
- Chose from 5 ABN AMRO ESG Profile Funds
- Our experts manage your fund
- You can start with € 20
Self-directed Investing
Do you want to decide for yourself what to invest in? At ABN AMRO, you can choose from two investment types: Self-directed Investing Basic and Self-directed Investing Plus.
- You have enough time and knowledge
- You decide for yourself what you invest in
- Choose from a range of investment funds, ETFs and shares.
- Start investing from €20
Portfolio Management
Do you want to invest a part of your money but prefer to leave it to the experts? Your asset manager will guide you with every decision you make.
- Choose from four ESG mandates
- Personal advice
- Always have insight into your assets
- Start investing from €50,000
Do you need help?
Do you have a question?
Find the answers to frequently asked questions about investing on our service page.
