Investing is not a risk-free endeavour. While investors tend to focus more on the micro aspects of their investments such as the individual performance of a public-listed company, many – even experienced investors – tend to forget there are macro forces that can have an adverse effect on one’s returns on investment.
Here are some potential risks every investor should be aware of, so one is able to manage expectations and take appropriate mitigation measures.
1. The global economy
Malaysia’s economy is heavily reliant on the export and import of goods. A global economy that isn’t doing well would lead to fewer exports from Malaysia, negatively affecting the financial performance of local companies.
When companies make less revenue and profit, share prices will decline, causing investors to lose money.
Conversely, if foreign companies are not able to import into the country, Malaysia could lose access to materials needed to make other products.
2. Changes in government policies
Government policies play an important role in the value of investments. The revised rules of the Malaysia My Second Home (MM2H) programme, for example, could lead to foreigners leaving the country, which in turn could impact the property market.
If you were heavily invested in construction companies prior to 2018, you might have experienced a significant investment loss when the Pakatan Harapan government came into power that year and initiated a comprehensive review on all infrastructure projects, causing a drop in share prices.
3. Current Covid situation
The various movement control orders (MCOs) have adversely affected investments as many companies have had to shut down.
Even if the market is slowly recovering thanks to the rapid vaccination rollout in Malaysia and gradual decrease in Covid cases, new variants and additional lockdowns in future could cause the value of investments to decline. Fingers crossed it will not come to that.
4. Inflation
Inflation is the change in the prices of everyday goods and services. Your investment value erodes if the rate of inflation is higher than your return.
As the economy recovers, product prices are expected to increase rapidly. It is important to take this into account as the profits you make from your investments are used to buy these goods and services.
5. Bad press and social media influence
The risk of bad press is becoming more pronounced in today’s highly connected world. News spreads fast and sentiment on investments can sour quickly.
Hits to a company’s reputation could come in the form of fraud allegations, labour abuse, wrongful statements from management and the like. Investors need to keep a close tab on their investments by monitoring the information available to them.
Meanwhile, social media and networks can influence market sentiment. Volatile investment prices could force you to buy or sell according to what investors are reportedly doing, rather than making decisions based on your own experience, skills and analyses.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.