This type of risk applies to debt investments and investments in companies that use large amounts of debt. It is the risk that the company you have invested in or lent money to will become insolvent, and will be unable to meet interest payments.

The downfall of the entrepreneurs of the 1980s was debt. They borrowed enormous sums of money for speculative ventures and big deals but had poor cash flow and eventually became unable to service their debts when interest rates kept rising.

Avoiding companies that are heavily geared is always a good idea as a stock investor. If you want to achieve magnified returns on your investment you can do your own gearing or invest in a quality managed fund that gears (like the Colonial First State Geared Fund). You don't want too many unknowns when you invest, and subjecting yourself to the risk that some mogul will go belly up is not sensible.

Beware any offers that seem too good to be true. Every weekend I see the newspapers chock full of advertisements for "low risk, high return" investments. In this case they may well be low volatility mortgage investments, but I would hesitate to call them low risk. The Pyramid Building Society went bust and took the life savings of hordes of risk-adverse investors with them because they lent out money imprudently. There are many other investments that have failed in the same way, just they didn't get as much attention. Recent headline grabbing failures in the Western Australian finance broking industry have again cost a lot of people a lot of money - people who were nervous of the stock market and sought something more solid and dependable in mortgages over real estate.

If the cash management trust, bond fund, investment bond or approved deposit fund has a Standard & Poors (Australia) Pty Ltd ("S&P") rating then only consider investments in the range of AAA to BBB to be worthy of investment. If a company has no S&P rating at all, then you might as well look elsewhere. The proportion of mortgages that get foreclosed with big losses to all concerned is staggering. If you want a low risk investment you are just going to have to settle for lower returns, there is no such thing as an investment with high returns and low risk.

No one will pay a higher interest rate than they have to. Banks are risk adverse and will only lend cheaply to those who are likely to pay them back in a timely manner. To the rest they will not give any money or will lend at only a higher rate. If an investor can only get finance at extremely high interest rates then it says that the various loan assessors that have looked at him think he is a deadbeat. Venture capital funds are considered high risk-high return because they give money to people that more "respectable" lenders turn away. Unfortunately there are plenty of unsophisticated people out there being drawn in by false claims of low risk, who take on the mantle of venture capitalist when all they really wanted was a retirement income stream. What is worse is that they are taking on all the risks of venture capitalism, but are undercompensated for the risk they take. People who are knowingly investing in this sort of thing expect very big returns, not just interest payments a few percent above commercial rates. Once again mismatch risk raises its head, though in a slightly different form.