1. Political risk
When governments threaten to take action that upsets domestic or international markets, or when certain populations (think protest movements) take steps that can cause assets to lose value, political risk is in play. The nationalisation of companies – or even industries – has happened on numerous occasions in developing economies. But political risk can be very much part of the picture in the developed world, too. We saw a clear illustration of this in the US when the federal government shut down for a short time last October. Today’s hot spots include Iraq, Syria, Ukraine and the Eurozone.
2. Currency risk
This one is self-explanatory. Sometimes referred to as exchange-rate risk, this comes up as the price of one currency changes – sometimes dramatically – relative to one or more other currencies. The HK dollar has been pegged to the US dollar for decades and fluctuates as its counterpart does. It’s important to remember that currency risk isn’t simply about your cash holdings. All or most of your investments are likely denominated in HK dollars. So they, too, are impacted indirectly by the currency value of the US dollar.
3. Interest rate risk
Given that central banks around the world have lowered interest rates to support economic growth, investors need to pay careful attention to this. President Trump’s economic expansion policies, including infrastructure spending, tax cuts and trade deals, are expected to lead to higher inflation and hence more interest rate increases. Investors should note that rising interest rates negatively impact stock and bond prices.
What is Asset Allocation?
Asset allocation can be an effective way to help manage risk in your investment portfolio. Simply put, asset allocation is a strategy that involves selecting a mix of investments appropriate to your risk tolerance, time horizon, and financial goals.
What are the most common types of investment assets?
The most common types of investment assets, or asset classes, are
- cash equivalents;
- fixed income securities, such as bonds or bond funds;
- and equity securities, such as stocks or equity funds
Each asset class is expected to have different levels of risk and return characteristics. So each will behave differently over time. For example, stocks are typically considered riskier than bonds, but they also offer the potential for higher returns over the long-term.
What options do I have for my portfolio?
If you're a young investor saving for retirement, with plenty of time before you're likely to withdraw the funds, you may wish to consider allocating more of your portfolio to equities, say maybe a split of 60% equities to 40% fixed income.
As you get closer to retirement, you may want the comfort of a more income-oriented portfolio, with say, maybe only 40% equities and 60% fixed income, even if it means giving up some of the potential for higher growth in exchange for lower, more steady returns.
Modifying your portfolio this way over time by increasing the fixed income allocation and decreasing the equity allocation may effectively reduce your portfolio's volatility as you approach your investment goals, such as retirement.
Along with asset allocation, you can further diversify your portfolio by selecting a mix of securities within each asset class. For example, there are different types of securities classified by geographical locations, industry sectors, or investment styles. And because investments within various asset classes may behave differently, a periodic review and rebalancing of your portfolio will help ensure it maintains the right asset mix based on your current circumstances.