Types of Investment Risks

 There are basically two categories of financial risk: The first is referred to as Systematic Risk.

Systematic risk influences a large number of investments across a wide spectrum. The financial crisis of 2008 would be a good example. Virtually, every asset was impacted adversely. This type of risk is almost impossible to protect against. In other words, sometimes lightning strikes.

The second is referred to as Unsystematic Risk, also commonly called "Specific Risk."

This is the type of risk that impacts a smaller number of investments across a narrow spectrum. An example of this would be a highly regarded company using dubious financial practices (think Enron). Proper diversification is the key to providing protection from this type of risk.

Now let's explain in more detail the specific types of Unsystematic Risk that exist in the world of investing.

Market Risk

This is the type of risk that you may be most familiar with. It is simply the normal fluctuations in the price of an investment. It is most apparent in stock-related investments.

Simply put, it is the risk that an investment will decline in value, due to market forces. This is also sometimes referred to as volatility, which is really the measure of market risk. These movements in markets are what provide the ability for an investor to make money.

Credit Risk

This is also referred to as default risk. This occurs when a person or entity (company/government agency, etc.) is unable to pay what they owe on their debt. It can be either the principal or the interest. Corporate bonds tend to have a higher risk of defaulting but tend to pay higher rates of return in an attempt to compensate. Government bonds tend to have lower default rates but pay a lower rate of return. If a bond is considered (by a rating agency) to have a relatively low likelihood of risk of default, then it is referred to as investment grade. Conversely, If a bond is considered (by a rating agency) to have a relatively high likelihood of default, then it is referred to as a junk bond. This is somewhat of a misnomer, since "junk bonds" can be a solid addition to an investment portfolio and can mitigate other types of risk.

Country Risk

This refers to the risk that is inherent when a country cannot meet its financial commitments (think Greece). When a country defaults on its obligations, the impact is often that of a cascading nature. That means not only will the bonds of the country be affected but also other financial assets within the country, such as the overall stock market. In addition, other countries or companies that do business with the defaulting company can also be impacted.

Foreign-Exchange Risk

Investing in foreign countries provides many advantages, especially in terms of diversification. When you invest in assets or debt of foreign countries, note that the currency exchange rates can change the price of the asset or debt. So, even though the asset increases in value when you exchange it for your home currency, you could suffer a loss. The converse is also true: the asset could go down, but when you transfer it into your home currency, you could also realize a gain.

Interest Rate Risk

This refers to the risk when a change in interest rates affects the value of an asset or debt instrument. Typically, the risk applies to bonds in a more direct fashion than it does to stocks. However, stocks, especially preferred, convertible and high dividend ones, can also be affected. With all things being equal, as interest rates increase, the value of the bond will decrease.

Political Risk

This refers to the risk that occurs when the policies of a country change, especially if it happens in a random manner. For example, if a company is selling in country ABC and that country radically changes its tax laws and becomes business unfriendly, companies that do business in that country can be adversely affected.

Letting Go of Emotional Investing Patterns

 When the Fed raised short-term interest rates in December, did you feel obligated to buy, sell or change your investing strategy solely on that knowledge? The urge to make an investment decision is often influenced by media reports and the sentimental value you apply to those investments. This frame of thinking may lead you to make investment decisions based on your emotions, and in the long-term, emotional investing may prevent your portfolio from reaching its true potential.

Focus on the long-term. Check yourself for news-driven fear or euphoria before you call your financial professional. Remind yourself of what your long-term financial goals are, and ask yourself if making a change would help you reach them. If you still feel you need to make a change, ask your professional for their perspective.

Root out unfitting investments. Do you still have your first stock certificate from mom and dad? Shares inherited from a favorite aunt? Stock from an early employer? There are all kinds of ways to acquire stocks over the years, and over time, some investments may not "fit" with your overall investment goals. It can be hard to detach from stocks with an emotional connection, but like unruly branches in your backyard, portfolios need pruning on a regular basis to perform at their best. Portfolios and individual stocks should be evaluated periodically to determine whether they are still appropriate holdings given your time horizon, risk tolerance and overall portfolio. Keep in mind that sometimes no changes are warranted, but it's a good habit to regularly review.

Strive for a balanced portfolio. Portfolios often need to be rebalanced over time, as your individual circumstances and the individual holdings' situation changes. Take an objective look at your portfolio and ensure you are comfortable with the level of risk. If company stock options are available to you, make sure you're aware of how that may impact your overall investment strategy. While it's good to have confidence in your company, having too much stock in one company may expose you to more risk than you intend.

Be consistent. Counteract impulse buying and selling with a consistent approach to investing. Automated investing makes it easy to implement a disciplined approach, such as investing a set amount at regular intervals. This systematic investing can be a way to help minimize the effects of market volatility in a portfolio; however you will still need to review over time to make sure the strategy fits with your overall goals.

Embrace diversity. You'll be in a better position to hang on to a sentimental favorite if the rest of your portfolio is diversified across a range of industries and assets. Diversity may provide balance in the event one or more sectors are down, but do keep in mind that diversity alone cannot protect against an investment loss.

Sell when the time is right. If you identify a loser that's not likely to turn around, it may be advantageous to sell it now. Many investors continue to hold an investment with the hope that one day it will pay off to hold it. If you're unsure about if you should cut your losses and move on, consult a financial professional who can give you an objective opinion.

Request a portfolio review. If you suspect your personal preferences and emotions are interfering with your investment decisions, defer to the experts. Ask a financial professional to conduct an objective review of your portfolio, with an eye to performance and your financial goals. Together you can look for opportunities to grow your earnings through disciplined investing strategies.

The Problem With Offshore Banks

 "What's the best way to rob a bank? Start one."

Many people have heard that old saw. But it's no longer accurate. The best way to rob a bank is to control a government... any old government will do these days.

It wasn't always like that. You see, for most of modern history, governments knew to keep their hands off banks. Whether led by kings, prime ministers, presidents or dictators, states understood that the first time they raided a private bank for loot would be the last. Bankers would close up shop and go somewhere else, and the next time the rulers needed to borrow some cash, there would be no lenders left in town.

My, how times have changed! Not only do modern governments feel perfectly free to steal from local banks or from offshore banks... they actively compete with each other to do so.

Guilty as Not Charged

It's more important than ever to be choosy when picking an offshore bank.

A few weeks ago, the government of Honduras seized the property of one of the country's leading businessmen - including the bank his family owned. The bank was liquidated, leaving over 200,000 local and foreign clients in the lurch.

Seizures and forced liquidations aren't uncommon, of course. Courts all over the world order such things all the time when individuals or organizations are convicted of crimes. What made the Honduran case unusual is that there was no court, no trial and no crime.

You see, a relative of the Honduran businessman in question had been arrested in the U.S., where extrajudicial asset forfeiture is practiced.

In the Land of the Free, federal, state and local authorities can and do seize all sorts of property on just about any pretext, simply by asserting that the property (a car, a house, a farm, cash, etc.) is somehow associated with a crime. They don't have to prove this - their own say-so is all they need. The owner of the seized property doesn't have to be guilty of anything, or even be charged with a crime. Instead, he or she has to prove that the property isn't "guilty." Most of these owners never manage to come up with the money, time or other resources needed to do so. So they lose their property, which is usually sold for profit or used by the government.

Get While the Gettin's Good

Knowing this, the Honduran government reasoned that it was likely that property in the U.S. belonging to the Honduran businessman's family would be seized by the U.S. authorities. They concluded that if this happened, the businessman's local bank might not be able to meet its commitments, angering a lot of local depositors who are also voters (or government officials).

So to get a jump on the process, so to speak, the Honduran government seized the bank before the U.S. government could get their hands on related property. It was a preemptive raid, not based on any proven violation of Honduran or U.S. law, but rather on the knowledge that if they didn't act first, the Yankees would. It's like a scene in a Western movie where one set of robbers races another to catch up with the stagecoach.

You might think this is a sui generis case, shaped by the U.S.' peculiar asset forfeiture practices. Maybe so... but the underlying logic behind Honduras' action has recently been globalized.

One Global Tax System, But Many Governments

Here's why: The G-20 recently adopted a global financial-information-exchange protocol, inspired by the U.S.' Foreign Account Tax Compliance Act (FATCA). Over the next few years, financial institutions everywhere will be sucked into a web of reporting designed to ensure that nobody can keep money secret from any government. Whether they like it or not, banks will have to hand over client information to their own governments, who will then share it with others.

It's easy to see how that will make tax enforcement easier. But it may also result in some nasty unintended consequences along the lines of the Honduras case.

If the G-20 data-sharing plan works as planned, government officials everywhere will be able to monitor changes in the offshore financial holdings of local individuals or businesses. This sort of intelligence could trigger precisely the sort of preemptive strikes that took place in Honduras. A big local business is losing money in its overseas operations? Better grab its local assets now, before a foreign court can seize them as part of a bankruptcy proceeding. Ditto for individuals.

The bottom line here is that, as always, government action - the G-20 reporting web - will create a new set of incentives that will have unpredictable consequences. The only thing we can be sure of is that government will look after its interests... not yours.

The world of offshore banks is becoming more complex. That's why it is absolutely critical that you have an inside guide to the most recent developments... so you can stay one step ahead of the government thieves.

The Next Shoe to Drop

 In 2014, when we forecast that the US dollar would appreciate to levels that the masses could not fathom, many thought we were nuts. How could we make such a prediction when at the same time, we were highlighting the massive, unsustainable US debt situation?

And it wasn't just that the US was in a serious debt situation, it was the how aggressively they were adding to that massive debt. It took the US almost 220 years to rack up its first $8.5 trillion in debt... then they doubled it in the last 8 years alone.

The US total Federal debt is now over $18 trillion & growing.

While the US continues to pile on more debt, the amount the government must pay to service that debt increases. According to the US Treasury Dept data, last year the US government spent $430 billion just to pay the interest to service their outstanding debt.

That is a mind numbing number... $430 billion to cover just one year's interest on the debt. And that is when interest rates are at historic lows. What happens when the interest rates 'normalize,' & double from current levels? Obviously, the payments to service this debt would also double.

So we understand why people get confused when we highlight all these minefields, yet at the same time forecast that the US dollar is going to reach levels that no one else can imagine.

The 'least ugly'

The US dollar will collapse eventually, but not yet. One of the main messages that we keep preaching is that we are in a global economy, & while the US has built up a massive, unsustainable level of debt, an amount that can never be paid off, there are other countries & regions that are in even more dire trouble than the US. The reality right now is, the US is the 'least ugly' of a group of very ugly global economies.

While rising rates will hurt the US economy, it will massacre many of the Emerging Market countries & companies. Why? - because these countries & companies have accumulated huge amounts of US dollar denominated debt.

When the US Federal Reserve started dropping the interest rates in 2008, it flooded the globe with cheap money. Hedge funds & large investors jumped in on this US dollar carry trade (borrow in US Dollars & then re-invest in other assets).

It seemed like a no-brainier to them. if you can borrow in US Dollars at 0.25%, & move that money into anything yielding more... you could make a killing. Hedge funds were borrowing $10 million, paying just $25K in interest & then turning around & buying some Emerging Market bonds yielding 8%-11%. locking in massive returns.

What could go wrong?

It wasn't just hedge funds or investors that were taking advantage of this cheap US money, governments & companies also borrowed in US Dollars to fund various projects. Everyone was scooping up this cheap money & re-investing it in other areas. The latest estimate that we can find show the total amount of money borrowed in US dollars & invested in other assets = $9 trillion.

Now the Fed is looking to 'normalize' rates. With rising interest rates in the US, the ensuing rise in the value of the dollar will wreak havoc among emerging markets' governments, financial institutions, corporations, & even households. Because they have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets' domestic interest rates higher, thus increasing debt-service costs further.

We keep reading & hearing various analysts warning of the demise of the US dollar. Yes, eventually, the US dollar will come under serious pressure, but that time is not now. What these mainstream analysts keep missing is that we live in a global economy & right now the US is NOT the big problem.

Look at this chart... it tells the story. The US dollar is gaining strength against ALL major currencies.

It also explains why commodities, precious metals etc are getting hit, they are priced in US dollars. When the dollar rises, the value of those assets declines.

In order to survive this coming economic tsunami, you need to stay clear of:

• long-term bonds, especially Euro & Japanese bonds
• the Euro & the Yen

If you are not an American, you want to convert a good portion of your local currency to US dollars on any rally in your local currency.