Are there any risks today that are impacting your investments? You need to be aware of them to protect your investments!

You don’t normally think about risks until you lose some money from your investments. After all, everything is good as long as your investments are doing well but when it doesn’t, you start to think about what is affecting it.

Hence, you need to be aware of what are the risks in the economy today and see how it will affect your investments. From there, you can effectively manage these risks and take appropriate mitigation measures.

#1: Performance of the Global Economy

Simply put, the global economy’s performance affects the performance of Malaysian’s economy significantly. Malaysia exports a big portion of its products to the world. For context, almost 70% of Malaysia’s Gross Domestic Product (GDP) in 2020 consists of exported goods to the global economy. Imports on the other hand consist of 60% of Malaysia’s GDP. This means that Malaysia’s economy is heavily reliant on countries in the global economy buying and selling goods to it.

If the global economy is not doing well, it will buy less exported products from Malaysia and negatively affect the financial performance of local companies. When companies make less revenue and profit, share prices of these companies will decline and you could lose a significant portion of your invented money.  Furthermore, if foreign companies are not able to import much to Malaysia, Malaysia will lose access to important import materials that are needed to make other products.

#2: Changes in Government Policies/Politics

Another major risk to your investment lies in the political conditions and situation in Malaysia. The last three years have seen some significant risks coming from the political landscape with its constantly changing government and political parties. This article doesn’t emphasize the politics in Malaysia but instead highlights the policy changes risks that come with change in governments.

Government policies in regards play an important role in the value of your investments and depending on the companies you have invested in, they can either be positive or negative to them. When different governments come into power, they have their own political stances and policies but it is the uncertainty from them that is a risk to your investment.

For example, if you were heavily invested in construction companies such as Gamuda or George Kent before 2018, you would have surely experienced a significant loss in your investment when the new government came into power in 2018. The government initiated a comprehensive review on all infrastructure projects and as investors didn’t know what to expect, most of these companies suffered a drop in share prices.

#3: Current Covid-19 Situation

Covid-19 cases in Malaysia remain stubbornly high at around 20,000 cases daily. This has had a negative impact on the value of your investments but the market gradually recovered when vaccination programs were rapidly rolled out. However, even if enough Malaysians are vaccinated, you need to be aware that the vaccine doesn’t completely protect us from the newest strains and variants of Covid-19.

Hence, there could be additional lockdowns in the future even if the population is sufficiently vaccinated if the current vaccines can’t effectively fight the newer variants of Covid-19. Lockdowns on the economy is brutal to your investments as it renders many companies to stop operating. This could propel the value of your investments to decline. However, you need to be aware also while this might be a risk if you invest in sectors like gloves or healthcare, worsening Covid-19 is actually positive for these sectors as it gives more business.

#4: Volatile Financial Performance

It is better to invest in something that you have some certainty as to how it’s going to perform in the future. Even if the investment value is going down, you can determine the right entry point based on this certainty and invest at the right time. However, if it is totally random how the investment will perform in the future, this makes it extremely risky to determine when to enter or exit your investments.

If that is the case with the investments you have, you need to be very careful when you manage this risk. A lot of research has shown that normal investors tend to hold on to their investment even when they have incurred a lot of losses. This happens a lot for companies with volatile financial performances, as there will be large swings in the share prices.

Sometimes, when the price drops to very low levels because you want to keep holding, it remains there and you actually sell it at the lowest level. It might have been better to just exit the investment early on to learn your lesson and live to invest another day.

#5: Inflation Eroding Your Investment Value

This is probably the most hidden and discreet risk to your investments. Inflation is the change in the prices of goods and services that you buy every day. It erodes your investment value if the inflation rate is higher than the investment return.

For example, if inflation is 5%, and your investment return is 4%, this means that your real return is -1%. You have to take this into consideration because, at the end of the day, the profits that you make from your investment are used to buy other goods and services. If the inflation rate is higher than your investment return, you are actually losing money and your ability to purchase things.

You have to be more mindful of inflation risk now because as the economy is recovering, the prices of things that you buy will increase rapidly. In the 2nd quarter of 2021, the consumer price index grew the strongest in 3 years at 4.1%. The consumer price index is expected to keep growing at a strong rate with the recovery of the economy, so you have to be mindful of the investment returns you are getting.

#6: Bad Press and Reputation Hits

The risk of bad press and reputation hits is becoming more pronounced in today’s highly connected world. News spread fast and sentiment on investments can sour pretty quickly also. Bad press and reputation hits could be things like:

  1. Allegations of fraud in the firm behind the investment.
  2. Labour abuse
  3. Management voicing politically incorrect stances and statements

These risks are getting more common these days, as investors keep a close tab on what is happening to their investments through better availability and ease of information. These risks if poorly handled paints a bad light on the capability of the firm or company. It will not be easy to recover from such risks if they do happen.

For example, in recent months, companies like Serba Dinamik has had bad press and reputation hits, due to the flagging of the company by its auditors. Share price dropped from RM1.61 in May 2021 to RM0.41 currently. It hasn’t recovered since then due to this.

#7: Social Media and Network Influence

This is a new risk that you need to be aware of. The impact of social media and networks has become more pronounced since the GameStop investment saga. If you have not read the the GameStop sage, MyPF did cover it in the past here. In a nutshell, the reddit forum of wallstreetbets precipitated the movement to buy GameStop stocks that drove share prices to astronomical levels. It proceeded to crash right after that, wiping out investors who bought at high levels.

Social media and network now have an impact on your investments where it could influence sentiments of investors in the market. Risks from it come in the form of volatile prices of investments and could force you to buy or sell according to what market investors are doing.

Conclusion

The risks to your investments these days comes in many forms where most of it is not within your control. However, you can take mitigation measures to ensure you are on the right side of the investment or trade to mitigate your losses by knowing how the risks affect your investments.

 

What other risks are there? Let us know in the comments below!

 

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