Investment Risks, Part 2 | Marvin Germo

Investment Risks, Part 2

By: Marvin Germo | July 1, 2014

The higher the risk, the high the possible reward and the lower the risk the lower the possible reward.  As what I always share with my 1:1 clients or during our seminars, that it’s not our responsibility to be scared of the risk but rather it is our job as investors to study and manage the risk at hand and to see if that investment fits us.  My desire for you is to invest and find an investment that fits the risk that you want.  Risk should not scare you but should be something you overcome by your studying and investment technique.  It’s not so hard and it can be done wherever you may be in life!

This week our resident risk expert, Rienzie Biolena will continue to share about the different investment risks!

Risk Part 2

Last week, I have written about risks that an investor should be aware of and take into account. For this week, I shall continue on with the list:

Inflation Risk. When we invest, it is with the expectation of a higher return in the future. We investto make our money grow so that it can fund these needs. But the cost of goods—like food, clothing, gas, etc.—inevitably rises every year. And that is Inflation. Inflation risk is the risk that the return of your investment is not enough to overtake the rate of which goods are rising. If the average inflation is at 4% and your money is just kept in a savings account giving only 0.5%. then you are practically losing money just by keeping it in the bank.

Liquidity Risk. When we invest, we exchange our money for something: a bank deposit, a share of stock, a bond, or a piece of land. As their value goes up, we can enjoy our profits as needed. But some investments cannot be sold readily. And that is Liquidity risk: the risk that the piece of investment you have cannot be sold immediately for cash. It may be because there are not be enough buyers out there, or there is not a ready buyer at hand. Take the case of real estate: it can take months before you can find a ready buyer and sell it. Compared that to a money market fund or mutual fund that you can withdraw and get the proceeds within just a few days.

Foreign Exchange Risk. Investing globally is a good way to diversify as you manage the risk of investing in just one country. Investing globally, however, often requires investing in dollar or other currencies. And while the investment in, say, dollar-denomination grows, if it does get converted back to peso and the dollar depreciates, it eats up on the return of the investment. As such global investors should be mindful not just of the projected rate of return for the investment instrument but for the projected currency pair as well.

Fund Manager Risk. Fund Managers, at the end of the day, are still part of the market and may make mistakes, wrong calls, or simply, their projections would not materialize as expected. Fund manager risk is the risk that they can make a wrong call regarding the market, the stock or the portfolio that they are managing.

Political Risk. Each government in place comes with different policies, governments, politicians, and laws. Ultimately, the laws, policies and regulations passed affect the businesses and companies that we invest in. Take the case of the Philippines. Due to the economic, fiscal, and administrative policies laid by previous and current administrations, the Philippine economy has been on the track to becoming a darling of investors—foreign businesses want to set-up their locations here, or local businesses would want to expand and serve a bourgeoning population. Had this still been a country full of red tape or coup d’etat or autocratic dictators, the story would have been very, very different.

Systematic Risk. Think of 2008—dubbed the ‘Greatest Recession since the Great Depression,” the Eurozone crisis, the Asian Market Crisis, etc. In a more interconnected global environment in which businesses, capital and markets cannot move without making an impact on the others, systematic risk is one huge risk that is quite hard to avoid, if at all. The world is a tad room-full already—and a commotion in one can stir a run all throughout. When the US or Chinese markets move, others jitter or tremble; when tensions rise in the Gulf region, gas prices rise.

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RPB Profile PicRienzie P. Biolena is one of the pioneering Registered Financial Planners of RFP Philippines. He is also an Accredited Investment Fiduciary of Pennsylvania-based fi360, a Certified Financial Consultant from Institute of Financial Consultant-Canada, and a Chartered Wealth Manager of the American Association of Financial Management.

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