Your Investments & Risks

An investment decision is basically about taking risks. Once a decision to invest is made, an investor is exposed to the potential risks that are associated with investing in the product. Ultimately, the ability of an investor to minimise these risks will determine whether he will gain or lose from the investment decision made.

There are a number of investment-related risks, which you, as an investor, should be aware of when making an investment decision.

Mismatch risk
Mismatch risk means an investment may not be suitable for your needs and circumstances. For example, if your investment goal is to have a consistent investment income but you invest in derivatives products, which require you to constantly meet your margin call when your position shows a loss, this means that your investment is not compatible with your financial goal.

You are subjecting yourself to mismatch risks. Another example of mismatch risks is when you choose to keep your cash in a short-term non-growth investment, such as savings account or fixed deposits, for a long-term objective like your retirement plan in 20 years' time. The return from this short-term non-growth investment may not be sufficient to meet your long-term objective.

Inflation risk
If the return derived from your investment is lower than the inflation rate, you have probably neglected to consider the effect of inflation on your investments. For instance, if you keep all your cash in a savings account, even though you will not lose a single cent, and in fact you would gain some return, in the end, inflation will likely “eat away” your future money value. This is because inflation will cause your future purchasing power to deteriorate even though you may end up with a higher amount than you currently have. Remember, one ringgit will buy less today compared with a few years ago because of inflation. Imagine the value of one ringgit in 20 years' time!