Investment Risk

When thinking about whether to invest charity money, it is important that you consider the level of risk that is appropriate in order to meet the trustees’ requirements. Trustees have to make decisions regarding investments within the standards set in the Trustee Act.  Any personal feelings have to be set aside as you are not investing your own money, but are charged with investing it appropriately for the charity’s benefit. 

The Trustee Act includes a number of points which, when followed, will ensure that the trustees are adhering to their duties.  The first point is that trustees must take advice from a suitably qualified adviser.  The adviser will make sure that they understand and the trustees’ requirements and discuss and agree the most appropriate strategy for achieving this.

The second point is that investments must be suitable for the trust.  The right type of investment must be used to meet the requirements of the trustees.

The final point is that investments should be diversified. This is aimed as reducing risk.

If the trustees follow the standard investment criteria and have a process in place for making investment decisions, they won’t go far wrong.

The important thing to remember is that even if the investments go down, you will only physically make a loss if you cash it in at that time.  If you see the investments fall, this is known as a paper loss as it is not a real loss until it is sold.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment at some point.

When recommending an investment, your adviser should explain the risks clearly, provide you with a risk warning and ensure that the investment is suitable for you.

Managing Risk

Risk cannot be eliminated completely but it is possible to manage it by diversification – spreading your risk.

Most investments have a degree of risk attached to them and different investments behave in different ways and are subject to different risks.   Putting your money into a range of different investments can help reduce any loss, should one or more of them fall.

It is important to remember the relationship between risk and reward.  The more risk you are prepared to take, the higher the potential reward.  If you are not prepared to lose any of your money under any circumstances then you will have to accept a lower level of return and an investment is probably not a product you should be considering.  If you see an investment offering a high return for little or no risk, it is likely to be too good to be true and you should be very wary.

There are many types of investments to consider from cash and government gilts (low risk and low returns) to overseas equities (higher risk and higher potential returns).

Currency Risk

Some investments will be subject to currency risk where they invest in other countries.  Currencies move in relation to each other.  If you are putting your money into investments in another country then their value will move up and down in line with currency changes as well as the normal share-price movements. However many funds are protected against this risk as the managers will use a process called hedging.

Inflation Risk

Inflation means that you will need more money in the future to buy the same things as now.  When investing, beating inflation is an important aim, whether for growth or income, particularly over the longer term.  Investing in cash in unlikely to beat inflation in the long term.

Timescale

When making decisions about investing, it is important to consider the timescale available for the investment.  If you require the funds at a certain time, it is important to choose a suitable investment for this length of time.  For example, if you only want the funds to be invested for up to five years, you should not invest in investments that require a longer timeframe to provide potentially higher returns, such as shares or property, which can fluctuate in value over the shorter term.

For further information contact Ruth Dolan, Chartered Financial Planner, on 01227 763939.

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