Do you know than even the safest of investments are not 100% bulletproof? Should you let it sleep under your mattress, accumulate interest in a saving accounts, invest it in properties, bonds or stocks, all investments are subject to risks. What could those risks be? And how to protect yourself from those risks?
1- Market
As you already know - unless you’ve just come back from a 2-years-desert-retreat - the markets are volatile lately. The word recession is in the air, and nobody can really predict how the markets are going to react tomorrow. The risks may be seen as high on the short term, but markets provides steady returns in the long run. A return of 8% to 10% over 10 year is quite common in developed markets. Hence the best way to protect your investment is to invest on a regular basis money that you allocate for the long term.
2- Company
You may buy some company shares, and see them decrease for different reasons. Or bet on the Japanese market & see it go south while the global markets go north. You may invest through a fund & see its investment company close its doors. Those are risks tied to the company - or group of companies - you bet on. The best way to reduce those risks is have a diversified investment portfolio. As the saying goes: “Don’t put all your eggs in the same basket!” You should work towards having several banks, many different brokers, a salad bowl of companies you invest in, across different markets, sectors, and geo-location - and which are not inter-related !
3- Interest
Should you hold fixed interest-bearing asset, such as a loan or a bond, you may consider yourself secured - especially in the type of markets we are currently experiencing. But should the interest rates rise, the price of your fixed rate bond will fall - and vice-versa. As you do not control the interest rates (unless you are Mr. Bernanke), your only way to reduce your risk is to follow the news & be reactive.
4- Inflation
Should prices go up, as they are for commodities lately, your purchasing power go down. With the same amount of money, you can now buy less than before. Should you saved some money, you need to invest in so that it beats inflation in order to achieve Real Growth. Historically, the best way to beat inflation is to invest in stocks & markets.
5- Currency
If you are working outside of your country of birth - or traveled internationally - you will certainly have experienced the pain of currency exchange. The currency risk arise when there are change in price of one currency against another. There basically are two risks here. Transaction risk - where you bet on a currency & suffer the exchange rates moves; and translation risk - which is when you hold assets in foreign currencies & your return are affected by both the change in the price of the stocks and the change in its currency. One of the best way to protect yourself against currency risk is to invest in the currency you are holding.
6- Liquidity
If you are specializing in with small markets, this risk may have occurred before. It arise when you want to trade an asset, but can not do it because nobody wants to sell / buy. Your main risk is to invest in an asset which you can not later sell - whatever the price. Many expats in Malaysia experienced this risk during the 1997 financial crisis. The best way to protect yourself is to invest in international trading funds, which are traded daily.
7- Political
As experienced today in Malaysia, some political or policy changes in a country can trigger market corrections. This risk is especially true in non-politically-stable countries or regions. Your best course of action here is to diversify your investments. Try to allocate your money across different geo-localization and markets.
8- Oneself
Finally, and certainly most importantly to your investment, is the risk yourself. Will you have the patience and nerves to stick to your investments strategy should the fundamentals be strong? Maybe even go cost-averaging should the opportunity arise? On the other side of the fence, do you have the guts to cut your sunken cost & realize you invested in the wrong stock? The difficult part of investing is not to get the theory right - Remember the 2 rules of W. Buffett: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”. The difficult part is to do it steadily & consciously for years & years. The best way to protect yourself against yourself, is to automatize your processes. If you invest for the long term, you only need to review your investment on a trimester basis, and maybe re-balance it if needed.
So what?
What you may have already realize is that not all of those risks are on the same time-frame. Inflation risks are not really short-term, while market ones are. Over the long term, the opposite is true.
At the end of the day, no investment is 100% bulletproof. You never know what tomorrow may bring. But should you have precise goals, and a strategy in place, you already are preparing yourself for success. It will certainly take time and hard work, but everybody can be a Paul Navone!
