The recent natural disasters across the world has brought climate risk to the fore. This has also caused concern among some about overly investing in physical assets. In this article, we discuss the new-age risk associated with physical and financial assets.
Climate and technology
All investments are exposed to some risk. Investment in bank deposits runs inflation, credit and reinvestment risk. Inflation risk is the risk price levels in the economy may be higher in the future than today. So, the post-tax maturity value of your deposit may not buy products that you want to in the future because prices have increased more than you expected. Equity investments run market risk — the risk the value will slide in the future. These are some traditional risks linked to financial investments.
Physical investments such as house property and gold are exposed to the risk of theft; someone could steal your physical gold or wrongfully acquire ownership of property. In recent times, the risk associated with physical investment extends to natural disasters. A house property located near the sea, for instance, has a high risk of being impacted by a tsunami or a cyclone. Add to this, the high geopolitical risk in some countries and you may wonder if investing in physical assets are optimal. But it is not that financial assets are protected from new-age risk.
Technology has facilitated rapid growth in modern-day markets. You can set up systematic investment plan through the time horizon for life goals. This eases the pressure of having to remember to make the investment every month. Importantly, SIP moderates the regret of investing as it distances you from the investing decision. But you are exposed to technology risk viz. technology glitches can hit investment records.
Conclusion
There are risks you can moderate. You can reduce credit risk by investing in large banks. You can moderate market risk by determining the appropriate equity allocation. But you cannot easily moderate climate/ technology risks. Both these new-age risks are yet known unknowns. You understand the risks exist, but may not know if and how a technology or a climate-related event will happen that can impact investments. You should have conviction that regulatory policies are in place to address the issues and moderate these new-age risks (especially technology risk) associated with your investments.
(The author offers training programmes for individuals to manage their personal investments)