BANCOR 3a: risks associated with financial investments
Investing in the financial markets always involves an element of risk. Before making an investment, it is essential to understand the different types of risk you are exposed to, in order to steer your investment strategy in an informed way.
The link between risk and return
The fundamental principle is simple: the higher the expected return, the greater the associated risk. For example, a traditional savings account may seem "risk-free", but only on the surface. In reality, it may be exposed to counterparty risk (linked to the solidity of the bank) or liquidity risk, particularly when withdrawal restrictions apply.
Furthermore, interest rates on classic savings accounts in Switzerland are currently around 0.5% to 1.5% per year, well below inflation, which has fluctuated between 2% and 3% in recent years. This means that in real terms, your savings may lose value.
Assessing risk
Every investment must be analysed with its specific risks in mind. Some are measurable (such as volatility or the historical correlation of assets), while others are more uncertain or exogenous, such as geopolitical, regulatory or tax-change risks.
Before investing, it is important to ask the right questions:
- What is the objective of this investment?
- Is it to preserve capital, prepare for retirement or grow wealth?
- What is your investment horizon?
- What loss are you prepared to accept if the markets turn?
For example, in a market-linked pension investment, the value of your capital can go down as well as up, depending in particular on movements in the equity or bond markets.
Our approach: diversification and risk control
In practice, we seek to limit risk systematically for every investor or pension plan member. To do so, we favour a diversified approach based on funds that provide broad exposure to different economic sectors and regions while keeping management fees low (often below 0.5% per year).
This strategy pools the risks associated with individual assets and captures overall market performance. It also helps to better manage the following risks:
- Market risk (equity volatility)
- Currency risk (exchange-rate fluctuations)
- Interest-rate risk (changes in bond yields)
- Counterparty risk (failure of a financial player)
- Macroeconomic risk (inflation, recession, geopolitical tensions, etc.)
In short, investing involves risks, but these can be controlled through a rigorous strategy, smart diversification, and a clear definition of your objectives and risk tolerance.