Investment risk management is an on-going exercise if we wish to meet our financial planning goals. As our personal situation changes, it’s important that we alter our investment portfolio to reflect new needs and requirements.
While it's relatively easy to assess risk at the point of investing, unforeseen events can force a rethink. The most recent high-profile global event which clearly illustrates this principle is the rapid fall in Cryptocurrency prices following the internal upheaval in Kazakhstan.
Kazakhs hit the streets after huge fuel price hikes angered the people and provided a catalyst for a wider political protest about corruption and the generally low standard of living most citizens endure compared with the elite. Kazakhstan is oil and mineral-rich and should be one of the wealthiest countries in the world. It is also the largest landlocked country, bordering global giants China and Russia. This makes Kazakhstan an important player in the region from a geopolitical perspective. However, the Chinese 'Belt and Road' plan and Russia's apparent yearning to get back to being a global super-power make the situation continually precarious, particularly when considering the vast amounts of money involved.
So, although we may be in control of our investment risk management when we set up a portfolio, global events can conspire to change the game; we need to be able to react accordingly.
Investment risk management and Cryptocurrency
Kazakhstan is one of the foremost Crypto mining territories. Crypto mining depends on a reliable source of low-cost energy due to the colossal costs associated with producing coins. Unfortunately, the Kazakh government closed down the internet as a response to the insurrection to block information that it didn't approve of leaving the country. This had a knock-on effect for the Crypto miners as production was forced to cease.
At the same time, the US Federal Reserve has hinted that they may increase interest rates at their next meeting. The combination of these factors sent Cryptocurrency prices sliding. The market-dominant coin, Bitcoin, fell around 15% in a week. This, following a general fall in prices from the high in November 2021 of approximately $67k to just below $43k today.
As ever, Pundits are now busy predicting the next moves. Some say buying the dip is a great opportunity; others are more cautious. Uncertainty appears to be the only certainty as we advance!
When establishing the risk level for any particular element of our overall financial planning strategy, we therefore need to be aware of the current economic and political situation and take account of any future threats that may affect our planning.
General principles of investment planning
What doesn't change is the need to practice investment risk management. These include:
- Make sure your investments are spread across a wide range of market sectors.
- Individual elements of your investment planning should be viewed in context with the overall financial plan.
- Only sell if you need to or think a security won't recover after a fall.
- Be realistic about your risk tolerance. There is no such thing as low risk, high return!
- Retain sufficient cash to ride out market volatility.
- Ensure your investment platform is flexible.
- Be very careful not to tie up your money in funds with lengthy access conditions.
- Remember that investing in currencies that you don't spend is an investment decision in itself.
- Be aware of the benefits of long-term investing.
- View your overall financial planning in the short, medium and long term.
- Always be on your guard. Protect yourself against fraud and scams by avoiding unregulated funds and ‘too good to be true, once in a lifetime’ opportunities.
- Never invest following unsolicited cold calls.
- Work with an experienced and trusted adviser.
- Take advantage of any tax beneficial investment instruments available to you: pension plans, Assurance Vie in France, Compliant Investment Bonds in Spain, ISAs in the UK.
In conclusion, there are events we can control and others we can't. We can make informed decisions about markets at the point of investment, based on what we know at the time. However, we must also be aware that global issues which are out of our control and unpredictable might mean we need to change our investment risk management strategy and portfolio makeup at any time.
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