The risk of doing nothing
Almost everything we do carries risk, unfortunately. Saving your money in a bank deposit account leaves it exposed to inflation risk. The long term rate of inflation in Singapore is around 2.8%. Therefore money on your bank account receiving no interest will lose approximately that much of its purchasing power each year.
However, there are many different types of investment available, some with greater risk than others, An investor’s financial goals and risk appetite will dictate what type of investment best suits them but, generally speaking, there should be a suitable investment solution out there for everyone.
Interest rate risk
Have you ever wondered why interest rate moves are so keenly watched by the financial community? They have an immediate impact on mortgages and saving accounts and are vital to the price of equities and bonds. When interest rates rise, cash investments become relatively more attractive than equities and bonds; this may cause their price to drop, and vice versa.
The effects of an interest rate rise or fall can be lessened by investing across a range of different asset classes i.e. holding investments across equities, bonds and the money markets.
Sector investing
Over certain periods of time, one or more market sectors will tend to outperform the overall market. While it might be tempting to invest purely in such sectors, if their fortunes change for the worse, the value of a portfolio would fall with them.
Investing in funds that offer exposure to different international markets can be a further way of spreading risk. This will increase exposure to good opportunities but help to lessen the risks associated with investing in one country’s stock market.
Market risk
This is the risk of investing in the stock market. For example, an unexpected event such as a terrorist attack or an economic or political event could cause values to fall. This type of volatility is hard-to-predict volatility and often leads to investor panic.
Taking a long term investing strategy is one way to combat this type of risk. Historically the equity markets have appreciated. Therefore by staying invested for five to ten years, investors have a greater chance of riding out short term ups and downs. (Volatility)
International exposure
Just as market sectors within one country will not always perform in the same way, stock markets across the world behave differently to each other. There may be times when for example, European markets will be stronger than those in the UK, or emerging markets, such as those in Asia, will perform better than large established ones, such as in the US.
Investing in funds that offer exposure to different international markets can be a further way of spreading risk. This will increase exposure to good opportunities but help to lessen the risks associated with investing in one country’s stock market.
