While sipping a refreshing brew of morning coffee at a local cafe, you flip past the front page news on the Greek debt crisis. An article on a local Singapore coffee company stealing Nestlé Nespresso market share catches your attention.

This is the type of tangible investment famed value investor Warren Buffet loves – from Fruit of the Loom underwear to the Wrigley’s gum and Cherry Coke he loves. You open up your investment app and buy 100 shares in the company.

By mid-morning, Greece is all over the news. Analysts have raised the country and political risk on Greece as the new president threatens to default on its loans. Foreign exchange traders flee to safety by selling the Euro and buying the Singapore dollar.

News reports state the Singapore monetary authorities, now fearing inflation from an overvalued dollar, will raise interest rates to make it more expensive to borrow money. The Singapore coffee shop can no longer afford to borrow money to finance its expansion into other Asian markets. Its stock price stagnates.

By lunchtime, your investment has been affected by six types of investment risks – all triggered by a crisis in Greece. Because you are investing in a global market in which economies are linked, a political ripple in Europe can affect the prices of Singapore stocks in your investment portfolio.

Investment Risks To Watch Out For

Here’s a closer look at the risks that affect your investment portfolio.

Credit/Default Risk

Credit Risk is the risk of a company, government or individual being unable to make payments on principal and interest on borrowed money. Government bonds are considered investment grade securities because governments have a good track record of making debt payments.

The bonds of issuers with a high default risk – or lack of liquidity to make payments on debt – are called junk, or non-investment grade, bonds. Credit rating agencies provide credit scores so potential investors and lenders can assess investment risk. AAA is the highest rating while junk bonds are rated BB/Ba or lower.

Foreign Exchange Risk

When investing in foreign assets – such as stocks, bonds, and real estate – currency exchange rates will affect the value of your investments. Online investing makes it easier than ever to invest in assets all over the world.

If your domestic currency is the Singapore dollar and you buy shares on the Hong Kong Stock Exchange in China Mobile, if the Singapore dollar depreciates against the Hong Kong dollar, the value of your investment will decline.  China Mobile’s performance will also be affected by its own currency risk as a company that buys and sells products and services globally.

Interest Rate Risk

Interest rates represent the cost of borrowing money. Bond investing is very sensitive to changes in interest rates. On a macro level, all investments are affected by changes in interest rates to some extent.

When monetary authorities raise the funds’ rate – the overnight cost of borrowing money – the cost of borrowing money is raised, whereas a decrease in interest rates makes it cheaper to borrow money, and thus increases the money supply in the economy. The increase or tightening of interest rates slows economic growth while a decrease or loosening stimulates economic growth.

Market Risk

Market risk reflects daily fluctuations in the price of stocks and options. The variation in the price of a financial instrument over a period of time is called volatility. High volatility stocks are higher risk. Low volatility stocks are safer, long-term investments. Short-term traders prefer high volatility, providing them with more opportunity to profit from changes in prices.

Country Risk

Country risk should be considered in emerging market investments, but even developed countries can face risks in the business environment. Greece, for example, has faced high default risk on its debt in recent years. All types of investments are subject to country risk.

Commonwealth countries Britain, Canada and Australia have the lowest country risk, while Africa has the most countries with high country risk. Country risk is very sensitive to changes in the business environment. Saudi Arabia’s country risk has increased while oil prices have fallen.

Political Risk

Political instability or the risk of political change is a greater risk in emerging markets, but as Greece’s debt crisis demonstrates, political stability can also hit developed markets.

How the different types of investment risks are weighted depends on the type of investments being analysed. A stock investment has more exposure to unsystematic risk, which are risks that affect a certain investment or asset class. The focus of your investment analysis will be on fundamentals (earnings, sales, cash flow, etc), competition, industry developments, credit risk, and so on.

The return on bonds or real estate investment trusts is directly linked to interest rates. Stock in an oil company exporting energy from foreign subsidiaries will be subject to currency risk and likely emerging market country and political risk.

In reality, company and industry fundamentals rather than the Greek default drama will influence your investment decision in the new coffee company.  The example of risk spreading globally, though, is a daily occurrence. Spreading your money across a portfolio of different investments is the best way to manage these risks.

Find out your Investment IQ.

 

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Founder @ The New Savvy
Anna Haotanto is the Advisor (former CEO) of The New Savvy. She is currently the COO of ABZD Capital and the CMO of Gourmet Food Holdings, an investment firm focusing on opportunities in the global F&B industry. She is part of the founding committee of the Singapore FinTech Association and heads the Women In FinTech and Partnership Committee. Anna is the President of the Singapore Management University Women Alumni. Anna invests and sits on the board of a few startups. Anna is also part of the Singapore Chinese Chamber of Commerce & Industry Career Women’s Group executive committee. Anna’s story is featured on Millionaire Minds on Channel NewsAsia. She hosts TV shows and events, namely for Channel NewsAsia’s “The Millennial Investor” and “Challenge Tomorrow”, a FinTech documentary. Anna was awarded “Her Times Youth Award” at the Rising50 Women Empowerment Gala, organised by the Indonesian Embassy of Singapore. The award was presented by His Excellency Ngurah Swajaya. She was also awarded Founder of the Year for ASEAN Rice Bowl Startup Awards. She was also awarded the Women Empowerment Award by the Asian Business & Social Forum. Anna has been awarded LinkedIn Power Profiles for founders (2018, 2017), Tatler Gen T, The Peak’s Trailblazers under 40 and a nominee for the Women of The Future award by Aviva

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