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Investment risk is one of the most important things you need to consider as an investor. Although many news stories show investment scams, there are still many people who easily believe and are deceived. Cases of investment scheme fraud or scammer fraud are easy to happen because of the attitude of individuals who are less cautious towards investment risk and expect immediate profits in a short period of time. Based on statistics released by the Bukit Aman Commercial Crime Investigation Department, a total of 1.7 million investment syndicate victims were reported over a four-year period with an estimated loss of RM4.9 billion.
Consider Investment Risks in Malaysia
Investment risk is generally closely related to the profit or loss that will be obtained. This means, the higher the risk, the more return on investment (or risk of loss) that will be obtained. Basically, every investment instrument has its own risk and return.
However, what is meant by investment risk? Basically, investment risk refers to the uncertainty or potential loss inherent in an investment. In other words, there is a possibility that every investment you participate in receives a lower rate of return or the investment incurs a loss than expected.
Because of this, you need to always be prepared with all the risks that may be encountered in the stock market. Here are some of the risks investors often face:
1. Inflation
Inflation affects the purchasing power of consumers. It also causes the value of money to shrink and there is an increase in the price of goods. If you used to have a piece of money of RM50 you could buy a variety of daily necessities.
But now that value can only buy a bottle of cooking oil and disposable diapers. As an investor, you need to take into account the potential return that will be obtained and ensure that it exceeds the current inflation rate to maximize profit.
2. Market
Market risk is one of the risks that investors will face. Basically, market risk is closely related to the ups and downs of the stock market. It is also influenced by current factors such as economic uncertainty, political conditions and so on.
For example, today’s gold price fluctuations in Malaysia are closely related to current factors such as world economy and politics, demand, inflation and oil prices as well as the price of the USD dollar.
3. Interest Rate
When there is an unexpected change in interest rates, fixed income securities such as bonds will receive an equivalent impact. Fixed income securities are very sensitive to interest rate risk – they are directly impacted by changes in interest rates. Usually, the value of bonds will fall if interest rates rise.
4. Credit
In addition, credit risk is also one of the risks that need to be considered when making your investment choices. If there is a situation where bond or sukuk issuers are unable or fail to pay returns to investors due to bankruptcy or the like, you may receive an equivalent impact.
Bondholders may not receive the promised interest or principal if the company that issued the bond is in financial trouble.
5 Strategies to Manage Investment Risks
Investment risk management is one of the important elements in ensuring that you do not experience large losses. If the investment is managed well, it can help you maximize profits. Here are five ways you can consider reducing risk before investing:
1. Diversify Your Investments
You are not encouraged to focus on one investment instrument only and diversify your investments. This is because, every investment has its own impact of loss (or potential profit).
By diversifying your investment instruments, it can indirectly help reduce the risk of loss and maximize your profit.
You can consider investment mediums such as Tabung Haji, Amanah Saham Bumiputra (ASB), unit trusts and so on.
2. Investment Risk: Understand Your Investment
Basically, every investment you participate in offers a different level of loss and profit depending on the type of investment you are making. Therefore, you need to be aware of each investment instrument you participate in.
A clear knowledge of the investments involved can reduce the investment risks that may be encountered. Understand the potential risks, study the return of interest or dividends and the performance of each type of investment involved to ensure that your investment does not incur losses.
3. Set Your Investment Objectives and Goals
Before engaging in any investment, you need to determine your investment objectives and goals. Without clear objectives and goals, it may be difficult for you to make a decision and choose the right investment instrument for you.
Among the common goals determined are such as retirement savings, debt management, children’s education, performing Hajj and Umrah and so on.
4. Investment Risk: Know Your Risk Tolerance
Every investment you participate in may be at risk of loss. Because of this, you need to identify your risk tolerance level. By identifying the level of risk tolerance, it can help you choose the type of investment and build the best and suitable investment portfolio for you.
For example, if your risk level is moderate (not a risk taker), you can choose low risk investments (conservative scale) such as Bank Rakyat Cooperative Stock Investment, Money Market Fund or Takaful Investment. However if you are a risk taker, you can consider more aggressive high risk investments.
5. Duration of Investment
Investment time is one of the loss tolerances that you need to consider before choosing the right investment for you. The longer your investment period, the safer and higher your investment profit. In Malaysia, EPF contributions are one of the best long-term investment examples you can choose.
Avoid Investments Mistakes to Minimize Losses
Risk must be something that cannot be avoided in everyday life. However, you can minimize losses by adopting the right investment strategy. You are advised to analyze, study and evaluate thoroughly before making the best decision for your future.
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