Gearing risk
Generally, when you borrow to invest, you are subjecting yourself to gearing risk. Investors must be prepared to accept the gearing risk because the value of their investments may fall. When you borrow to invest, you may suffer losses if the interest cost exceeds the returns from the investments. Investors must remember, the higher your gearing (the amount you borrow), the higher the risk.
Legislative risk
Essentially, legislative risk refers to changes of rules and regulations which impact on your investment returns. When you map your investment strategy, you generally assume the current laws and regulations will not change. However, there are always the risks that these rules could change. Some legislative amendments may affect investments. For example, a country's tax regime may be changed whereby tax is imposed on returns on investments. Such changes in law may affect the investment goal of an investor. Usually, changes to the law will not happen overnight, keep yourself informed on the latest developments at the legal front. This would enable you to review your investment strategies to accommodate the legislative changes. Remember, the law is not only for lawyers.
The table below summarises some of the risks that can affect your investments.
No. |
Types of Risks |
What Does It Mean? |
1. |
Mismatch risk |
The investment you choose is not appropriate for your financial goals |
2. |
Inflation risk |
The return of your investment is lower than inflation, resulting in lower future purchasing power of your ringgit. |
3. |
Interest rate risk |
The possibility of lower investment return due to a change in the level of interest rates. |
4. |
Reinvestment risk |
The risk of lower return on reinvestment due to a change in the level of interest rates. |
5. |
Market risk |
The value of your investment could go up as well as down due to the movements in the market. |
6. |
Market timing risk |
The difficulty in anticipating the rises and falls of the market. |
7. |
Non-diversification risk |
The risk in relying on only one type of investment. |
8. |
Liquidity risk |
The ability to access your money fast or without cost when you need to. |
9. |
Credit risk |
Applies to debt-type investments where the institution that you have invested in may not be able to make the required interest payments or repay your funds. |
10. |
Gearing risk |
You borrow to invest but the return from your investment is lower than the cost of your borrowing. |
11. |
Legislative risk |
Your investment strategies could be affected by changes in the laws and regulations. |
The types of risk described in this article are by no means exhaustive but they are the common risks associated with investments. Always remember the golden rule in investment, “the higher the expected return, the higher the likely risk”. |
