06 Nov Caveat Emptor
Latin for “let the buyer beware.” This basic premise states that the buyer buys at his/her own risk. In other words, a buyer is responsible for examining the condition of an item, product or service for obvious defects and imperfections before committing to a purchase.
Caveat emptor applies as much to investors as anyone else. There are many ways to invest money and there are many stories about when things have gone wrong. The Australian Securities and Investment Commission (ASIC) is the consumer protection regulator for financial services. Their role is to protect investors and to promote honesty and fairness.
As much as ASIC plays an important role in maintaining the integrity of the financial services industry, it is as much the responsibility of the investor (the buyer) to ensure they are not putting themselves at undue risk.
Keep in mind, risk is inherent to investing and there are many different types of risk associated with investing.
Risk vs. Uncertainty
Risk and Uncertainty are different. The possibility that things may not turn out exactly as you expected is Uncertainty. Risk comes in many forms and guises, to some may mean the possibility of losing a portion of their investment capital. For others, the risk of assets not producing enough income on which to live may dominate their concerns.
Risk and Uncertainty cannot be eliminated. However, they can be measured and managed within a portfolio. The key is to determine the appropriate level of risk for you. Taking on greater uncertainty and short-term risk may be necessary for you to gain the long-term returns needed to achieve your lifestyle goals and objectives.
What Are Some Types of Risk?
There are a number of risks to be considered when constructing an investment portfolio, here are just some:
- Market Risk is the possibility that investments in a particular market, for example, Shares, will be affected by an event. An obvious event was the 2001 September 11 event.
- Investment Specific Risk is the possibility that a particular investment may under-perform the market or its competitors.
- Inflation Risk is the possibility that your investment return is below the inflation rate, which reduces the spending power of your money.
- Interest Rate Risk is the possibility that your investment will be adversely impacted by a fall or rise in interest rates.
- Legislative Risk is the possibility that a change in legislation will impact the appropriateness of certain investments for you.
- Liquidity Risk relates to the ease with which you can sell or liquidate your investments. Some investments have limitations on withdrawals while other investments may be difficult to sell due to a lack of buyers.
ASIC provides a website for consumers, www.fido.gov.au. Here you’ll find very good tips and other information designed to assist the public in their financial dealings. Included are example stories of when things have gone wrong, warnings, tips, checklists and general information about investment products.