By no means is this list a definite and exhaustive one, there are many different issues and considerations surrounding the risk / return relationship.
Risk / return are are bound together in every investment opportunity.
Some risks are obvious, some more surreptitious, and some are not apparent at all. Even leaving your money in a high street bank account can open you up to many risks that many people do not consider; low interest rates and inflation, even hackers and scammers. But, here, under this heading, we’re going to concentrate on what we believe should be your major concerns, and the primary focus of your due diligence investigations. Much of the content is simply questions we feel you should be asking, if not from the promoters of the respective investments, then certainly of yourself.
Obvious first considerations are size, history and reputation. Barclays, HSBC, Lloyds NatWest etc. are probably less likely to lose your money than ABC Investments Limited based in Panama for example. It might seem like a stereotype, but staying close to home and with well-known brands can keep you safer. Of course, when the big corporation go bang, it ripples through an entire economy and can easily cause an entire credit crisis all of its own.
In contrast and entirely due to their perceived stability, the big institutions don’t offer you very much in the way of interest, they rely on their name and reputation to pay you far lower returns on your investment. At the other end of the risk scale, those small venture capital firms, with no known team, little in the way in history, and offering far higher returns on your money, in some cases will simply disappear with it.
What is the key to success? Diversification! No one will ever become rich keeping their hard earned money in in a high street bank. Banks are designed to make money from their clients not to benefit them. It is always a good idea to have instance access to liquid cash and also a good idea to diversify.
Here’s a handy table to demonstrate today’s best performing ISA’s
So how do you obtain a decent rate of return without going too far up the risk scale?
- Read all documentation, understand the product, and gain an insight into the underlying business model.
- Does the business product make sense to you? Is it correctly priced?
- Study the team and the names of the Directors and Shareholders of the proposed investment. Do they have a history of success? Often a quick internet search on the names of the actual directors can give you a lot of information.
- Is the opportunity based upon a trend or sudden fad? Is it likely to be sustainable? Early investors in Bitcoin are all now very wealthy, those that came later might well have lost a lot of money.
- Is it based upon a commodity or service, is the pricing highly volatile?
- Can you take the strain of fluctuations in performance? Or are you reliant on the income derived from the investment?
- Are you looking for a short-term, medium-term or long-term investment? Do you need access to your funds on an tie up a proportion of your funds for a period of time in order to gain a higher return?
- Do you need the investment, units, product or security to be traded on a fluid market? Is there an active secondary market? Can you buy and sell the financial instrument independently of the Issuer?
- Are you looking for Income or Growth?
- Have you actually calculated the capital you intend to invest, the interest you will receive and when? Part from a UK ISA, have you calculated the tax implications?
- In terms of a UK ISA, have you calculated the actual tax-free proportion of the ISA? Is it worth it? Can you get more interest elsewhere, even if you pay a little tax?
We hope these few paragraphs have given you food for thought, and just maybe will cause you to look at some of the investment offerings more carefully. As much as the level of interest paid by High Street banks is ludicrous, losing all your money isn’t a good idea either, you probably want to fit somewhere in-between; not too much risk, but at least a decent return on your money?