During the 'tech wreck' in the international sharemarket between 2000 and 2003, many investors cashed up and sought refuge in fixed interest investments, believing them to be safer than shares. Money flooded into finance company debentures and unfortunately many investors failed to realise that there are still risks with these investments; it's just that they are different risks than with a share portfolio.

The Securities Commission has launched a new website (www.looklearninvest.org.nz) aimed at educating investors about investment risk. This website should be compulsory reading for all investors. The Securities Commission defines risk quite simply as the chance that an investment will not be as good as you expected or were promised. Risk applies not only to the return on your investment (such as interest, dividends and growth in value) but also to the principal sum invested.

Looking at fixed interest investments for example, some of the risks that you might face are:

• Your interest payments are made late, in part or not at all
• Your principal is repaid late, in part or not at all
• During the investment term, market interest rates increase significantly meaning that your investment is now earning a lower return than the market
• At the end of the investment term, you find that interest rates have dropped and you will earn less on reinvestment
• Your investment cannot be sold or redeemed before maturity either because there is either no market for it or there is a market but no buyers
• Inflation increases significantly during the term of the investment, and eats into your returns
• The industry or companies to which your funds are lent suffer a downturn, increasing the risk of default
• A significant issue, such as a credit squeeze or an economic recession, increases risk across the board for all fixed interest investments

While this all sounds very gloomy, there are several steps you can take to minimise the risks you face. The most obvious of these is to diversify. Divide the amount you have to invest into several smaller parcels so that ideally no more than 5-10% of your money is in any one particular investment.

Think about how much risk you are willing to take and invest accordingly. If you are a conservative investor that probably means finding investments that have a good credit rating from an internationally recognised rating agency. If you choose to place your funds in unrated investments, be prepared to do some research that will help you assess the risks involved. Spread your money across different investment terms so that you avoid the risk of having it all mature at once when rates are low and so that you can access funds if you need to.

Try different types of investment as well - for example a mix of bank deposits, finance company debentures, corporate bonds, fixed interest funds and shares. Most investors experience loss at some time, but if you have structured your portfolio well, the overall return on your portfolio after taking losses into account should still be pleasing.

Article by Liz Koh

Liz Koh is a financial adviser. A copy of her disclosure statement can be obtained on request and free of charge by calling 0800 273 847.

Ph 0800 273 847

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