Recognising Different Types Of Risk When Investing As An Expat

When it comes to investing as an expat, it’s important to know what risk means, and also how it is often misunderstood.

James Nicholas, Chartered Financial Planner at Skybound Wealth is a firm believer that avoiding risk when investing as an expat is impossible. However, James explains why it’s important to understand the different types of risk, what you are comfortable with, and how it isn’t always a bad thing!

Arguably the greatest investor of all time, Warren Buffet once said - "Risk is not knowing what you are doing". In my view, this is very true when investing. Over time, I have noticed what risk means to clients can typically be split into three different categories. Understanding which category you fall into is incredibly important and here’s why.

1. Capital Loss

Whether it be during a consultation with a prospective client, or an annual review with an existing client, I often hear the words ‘I don’t want to take any risk’. When I ask them to explain what they mean by risk, they typically detail a scenario where they lose all their money. This scenario is what I would describe as ‘loss of capital risk’.

Undoubtedly, the most severe form of risk. This occurs when investors expose themselves to the possibility of losing their entire savings by engaging in speculative ventures, such as investing in high-flying individual stocks, cryptocurrencies or anything else that might be working now but hasn’t stood the test of time.

2. Inflation  

Neglecting to strategically counteract inflation in your investment portfolio can significantly erode your purchasing power over time. Just as a proactive business owner vigilantly oversees operational costs to maximize profitability,as an investor, it's crucial to ensure your investments are structured to outpace inflation, thereby safeguarding your financial future against the silent threat of diminishing purchasing power. This leads us to a critical aspect mitigating the loss of purchasing power risk.

Also known as inflation risk, loss of purchasing power risk can be the silent killer as an expat when investing for the future. In an era marked by advancements in medical science and increased life expectancy, the risk of outliving our financial resources is one that can’t be ignored. Yet, regrettably, many expats fail to account for inflation eating away at their money, opting instead to stash their funds in cash and low-interest saving accounts over a long-term.

3. Harnessing Volatility

The third form of risk I often encounter is ‘Volatility Risk’. Most commonly associated with investing in the stock market, in my opinion, this is simply one aspect of risk long-term, a disciplined expat investor shouldn’t worry about – as long as they don’t react to it.

Undoubtedly, stock markets suffer from shocks and slumps, but it’s important to remember that throughout history they’ve continued their advance; each time bouncing back and reaching new highs. And while history is littered with stories of those who panicked and reacted and lost fortunes in the process, those who remained disciplined and stuck to their long-term plan reap the rewards.

Whenever I meet with a client, before making any recommendations, I spend a lot of time ensuring they understand both the risks involved when investing as an expat, and how they might react should a shock occur. Knowing what can happen in a range of positive and negative scenarios allows us to work together and craft a plan is easier to stick to should the going get tough.

As a result,  when a market drops, we don’t reach for the panic button, we simply stay calm, let the market do its thing and look at how we can take advantage of this volatility.

I firmly believe volatility within asset classes that have stood the test of time, to be the safest form of risk over the long-term and should be something you embrace rather than fear when investing as an expat. I'd strongly recommend having a discussion with a qualified adviser who has experience of assisting expats to figure out which type of risk is the right fit for you and your financial journey.

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About James Nicholas  - Chartered Financial Planner at Skybound Wealth Management

As a seasoned Chartered Financial Planner with over a decade of experience in financial services, James specialises in providing tailored financial advice to expatriates. Based in Dubai, James uses his knowledge and personal experience to assist expats in navigating the unique financial challenges and opportunities they encounter while living overseas, ensuring they achieve financial security.

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