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What are the risks related to my portfolio?
What are the risks related to my portfolio?

General overview of risks related to investing

Vaiki Randala avatar
Written by Vaiki Randala
Updated over a week ago

🌱 General overview of risks related to investing

Please note that this overview does not provide an exhaustive explanation of all the investment risks and, therefore, you as an investor should independently study and analyze also other risks arising and associated with investment activities.

Every investor should always carefully consider whether they he/she is able to bear those risks, taking into account previous investment experience, investment objectives, financial and economic possibilities and other similar circumstances.

When managed by us, your portfolio will consist of exchange traded funds (ETF) and index-funds. For your better understanding of your future portfolio related risks, we want to draw your attention to the following risk categories which in minimum you should consider before investing.

🌱 Price risk and how to cope with it

The price of the exchange traded instrument is subject to up and down movements, which is related to offers and acceptances made for buying and selling of these instruments on the open market. The down movements of the market price therefore reduce the value of an investment. An investor may lose a part of the capital invested if he/she sells when the price is lower than what it was when instruments were purchased.

The price movements can stem from general risks (e.g. geographical risks, political risks, legislative risk, and economic risk) as well as business-related risks. In some situations a company whose shares are traded may even face bankruptcy, and thus there is a risk that the investor will lose all the capital he/she has invested into this specific company’s shares. Thus, the specific shares of a company are generally considered instruments with a higher risk than instruments that consist of several different instruments (shares, bonds etc).

The exchange traded funds (ETF) and index-funds therefore come with lesser risk than a single company shares since they are a type of funds that hold multiple underlying assets, rather than only one (like a single stock). Because there are multiple assets within an ETF or index, they help for investment diversification. Nevertheless also the market price of ETF-s and index-funds has volatility and it should be taken into consideration.

Usually a longer investment period and continuous (e.g. month by month) investment helps against volatility since in such case you also invest when the price is low.

🌱 Concentration risk and how to cope with it

The old saying “one should not keep all the eggs in one basket” explains the concentration risk in a simplest way. In other words, the concentration risk in relation to investing is present for example in a situation where you have put all your investments into one or very few single company stocks. In case such company or companies would face bankruptcy or lose value due to failing businesses you also lose much or all of your investment.

Should have you diversified your investments, i.e. mixed a wider variety of investments into your portfolio the risk of losing all or large part of your investment over a short period of time or due to one single event is also reduced. The exchange traded funds (ETF) and index-funds are diversified a great deal consisting of hundreds of different assets and have therefore lesser concentration risk involved.

🌱 Sustainability risk and how to cope with it

Sustainability risk can occur in different ways and in different situations but in our product context could mean for example that some of the ETFs investors’ money is invested to, categorize themselves as Article 8 or 9 but later such categorization turns out to be wrong. It could be because of “greenwashing” scandals, due to lack or insufficient quality data, due to use of wrong methodology or wrong interpretation of data etc. Such events may lead to decrease of ETF investment value, contributing to possible lower or negative returns.

When choosing ETFs we apply our Investment Principles according to what we select Fund Managers who are reputable. Besides checking if the ETF qualifies as Article 8 or 9 we compare with different independent rating providers as MSCI and Morning Star. We choose well diversified ETFs with lower impact from single company actions. For example, if ETFs have invested into hundreds of stock companies and one gets accused of “greenwashing” then the event does not have huge impact on the ETF and Fund Managers are able to take necessary actions.

🌱 Liquidity risk and how to cope with it

Investments also entail the risk that the security cannot be sold if necessary, as a buyer who would buy the security on acceptable conditions cannot be found. Liquidity risk is primarily related to securities that are not traded on the regulated (open) market. Usually, the securities that are exchange traded such as ETF-s and index-funds are likely to be successfully sold and purchased.

The liquidity risk (if at all) related to exchange traded securities is more likely to manifest as price risk because in a situation where there is lesser persons interested of buying a security then the price of the security shall fall.

🌱 Currency risk and how to cope with it

If an investment is made in foreign currency (i.e. other than the original currency of
an investor) then the change in currency exchange rates may bring a loss when the
investment is sold and returns changed back to the original currency.

We aim to invest primarily in your original currency and only invest in funds that trade in such currency, but some or more of the stocks and bonds inside a fund might be held in a different currency, thereby, exposing your portfolio to certain degree of foreign currency risk.

🌱 Interest rate risk and how to cope with it

Interest rate movements can affect the valuation of assets, particularly bonds, and
subsequently, bond funds. When interest rates rise (fall), bond prices fall (rise).
There is a risk measure called “duration”, which stated simply means, if interest
rates go up, by how much will a bond price fall.

Usually, the higher the duration, the higher the risk of the bond. A higher duration also generally means a higher potential return on a bond.

🌱 Regulatory risk and how to cope with it

Due to amendments to legislation, an investor may incur a loss due to an increased tax liability or other adverse amendment to law that may reduce the return on the investment.

Every investor should study at least the basic tax law issues before investing and before withdrawing from investment. Please note that we cannot provide tax legal advice to our customers.

🌱 Settlement risk and how to cope with it

In certain cases, an equity transaction may also entail the risk that the counterparty does not transfer the sum of money or securities agreed. Such a risk occurs, for example, in the event of a subscription of equities where the securities transaction is not made in a central register against payment, but the money moves separately via a bank transfer and securities without payment.

Nevertheless, when the transaction is made through a regulated market (exchange) this risk is as low as it can be for example if compared with transactions made outside the regulated market. We make all the transactions on regulated open market (stock exchange) and settlement risk is minimal.

🌱 Depositary risk and how to cope with it

The securities are usually held with a credit institution (e.g. banks or other credit institution) on a securities account. Depending on the situation the owner of a security may have a personal securities account or someone can hold the securities on behalf of him/her.

In any case it must be taken into consideration that the securities may be managed in a chain of several levels: credit institutions may, in turn, deposit securities with their sub-depositaries etc.

Therefore, there is an inevitable threat of loss of assets kept with the depositary/account manager through insolvency, bankruptcy, negligence or the intentional illegal act of the depositary or any other person organizing the safekeeping of the assets.

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