FAP and SIACAP: Loss or decrease in value?

Recently, the national press has pointed out, not without apprehension, the "loss" of US$150 million from the Panama Savings Fund (FAP). Likewise, economists from the "academy" have pointed out the "losses" in the investment portfolio of the SIACAP (Public Servants' Pension Savings and Capitalization System) funds as symptoms of a "failed" system. 

Both assessments and the consequent negative insinuations derive from the generalized lack of knowledge about the risks and dynamics of investment portfolios. With this paper, I will provide some basic ideas on portfolio management and repeat the risks faced by securities and portfolios, in order to make clear what are and what are not investment losses, whether private or governmental.

First of all, let us review the most common risks involved in investments in securities. First, there is a "credit risk" or "non-payment" risk, i.e. that the investment may be a total or partial failure and that the money invested may not be recovered. In addition to the issuer's soundness, this risk is associated with the economic and political situation that may affect the issuer. 

Another common risk is liquidity risk or redemption risk, i.e., the risk that, at a given time, the investment cannot be converted into cash. The first of these two risks is mitigated or minimized by making an exhaustive analysis of the investment or by following the investment and country risk guidelines of the risk rating agencies. The second is by investing in instruments that are traded in open markets, which allows you to sell the investment easily if necessary.

But securities have other risks that vary with the day to day of the markets and the economy, the best known and most elusive is the so-called "rate risk" or "market risk" which is the impact that increases or decreases in market rates can have on the price of a security whose interest rate is fixed or is different from the market rate. A bond, which has an interest rate lower than the rate paid by the market today, would have a lower price than its initial value. Conversely, a bond that pays more than the market should be able to be quoted and sold for a price higher than the acquisition price.