Understanding the 6 risks of Investment

iStock

It may be surprising to know that all investors face the same risks when making in investment into any asset class. How can this be? The answer is simpler than you think. As human beings we sometimes complicate matters that when considered from a practical perspective aren’t that complicated at all. The understanding of risk is certainly one of those, partially done on purpose by an industry that uses risk as a “sales tool” and partly because risk is a concept that can get out of hand if it isn’t anchored to practical human experience.

We assess risk because we fundamentally have an aversion to loss and pain. As humans, loss and pain are negative experiences and we have built in genetic mechanisms to move away from it and avoid them.

The accepted view of risk can be summed up in the following line – “what are the chances of x happening?” – the assumption being that x is some kind of bad outcome. Definitions are great but how do we place this into a framework that is practical and meaningful?

As investors how can we assess risk quickly and effectively in a way that assists us to compare the “risk” of different investments across different asset classes?
Use ISG’s risk assessment framework.

ISG has created an easy to use risk model that simplifies the process of assessing the “risk signature” of any investment opportunity across any investment class. It provides the user with the 6 risks that all investors should assess when making an investment.

The 6 risks are:

  1. Capital Amount Risk – The risk that the capital amount invested will be reduced or lost.
  2. Capital Timing Risk – The risk that the return of capital won’t be delivered within the expected time frame.
  3. Return Amount Risk – The risk that the quoted or expected return amount will be less than expected.
  4. Return Timing Risk – The risk that the return will not be delivered within the expected time frame.
  5. Liquidity Risk – The risk that the investment cannot be liquefied when expected or required.
  6. Control Risk – The risk that in the event of default or liquidation events that the Investor has no control or input in relation to the recovery of funds.

To use the framework the user just steps through the above 6 risks and lists those risk factors that would increase the chances of that particular risk becoming real. If you can’t fill out at least one risk factor for each core risk (you should be able to list many) then it’s a sign that you may need more understanding of the underlying investment or you should simply pass.

Once you have the list of risk factors, get an understanding of how these risk factors are being managed. If you’re satisfied with how they are being managed then you can accept them and progress if not then that’s ok too.

All investments can be assessed using the ISG risk assessment framework. It’s a practical framework that takes a no-nonsense approach to risk assessment. As an added bonus all of ISG’s investments have the ISG risk assessment detailed within the relevant disclosure documents for the investors convenience.

Share on facebook
Share on twitter
Share on linkedin
Favicon

ISG Funds Management

ISG Funds Management is a family-run, independent funds manager that focusses on you with access to private sector project and company investments in a safe and regulated way. When you invest in our funds, you will be investing in medium to large property projects with strong fundamentals in quality locations, or small-to-medium sized businesses with strong prospects and a history of solid performance.