In previous articles we discussed different aspects of Model Portfolios including what considerations one should take when selecting his/her own risk tolerance and profile. This article will explore the issue of risk tolerance in more detail. As explained previously each and every one of us is different and therefore we cannot have one strategy that fits all. Every person has different needs and objectives, circumstances and experiences. This concept is important when one is about to invest in a Model Portfolio of funds.
Begin by selecting your own risk profile. A risk profile is influenced by personal circumstances, financial goals and the length of time you wish to remain invested. You could use your risk profile to help choose your best investment options. You may be willing to accept more risk for potentially greater gains or prefer less volatility for a smaller but steady return.
There is no such thing as a risk-free investment. Investing is all about choosing the risks you feel most comfortable taking. A diversified portfolio can be a helpful way to weather the big swings over time as the market fluctuates. It is conventional wisdom that a younger investor has a long-term horizon in terms of the need of investments and can tolerate more risk, whilst an older individual has a short term horizon, especially once that individual is retired, and would tolerate low risk.
At Mediterranean Bank we offer five Model Portfolios with different risk tolerances as per below.
1. Defensive
This investment strategy is designed for those who want their savings to keep pace with inflation and want to limit their exposure to market fluctuations. It is ideal for an individual who is not willing to tolerate noticeable downside market fluctuations and is willing to forego almost all significant upside potential, relative to the markets, to achieve this goal. Therefore, the overall return, while not guaranteed, may underperform the returns achievable from a higher-risk approach.
A Defensive Model Portfolio will be invested in the most risk-averse asset class, such as cash and bonds and only a limited allocation will be invested in equities.
2. Conservative
This investment style is suitable for those who want their savings to slightly outpace inflation and who can tolerate a little more risk than the defensive investor. While conservative portfolios may experience some limited short term losses in weak markets, they seek to provide medium to long term capital appreciation. This approach concentrates on stability rather than maximizing return, and should limit the chances of substantial short term volatility. The typical investor in this category is either retired and depending on the portfolio income to sustain his income, soon to be retired, or has had bad investment experiences in the past. These investors want to be protected somewhat from large downside market fluctuations and are willing to limit their profits when markets rally upwards.
A Conservative Model Portfolio will be invested primarily in risk-averse areas such as cash and bonds with only a modest exposure to equities. The overall medium to long term return, while not guaranteed, may underperform the returns achievable from a higher-risk approach but should out-perform the returns of a more defensive portfolio.
3. Balanced
The majority of investors would typically be in this middle-of-the-road category, looking for a balance between risk and return. In the short term, an investor within this strategy may experience healthy growth in up markets, but most likely will experience some downward movement during down markets. However over the long term the investor may experience a modest, variable rate of return. These investors want good returns, and know they’re taking some volatility risk to get them. Their portfolio normally tends to go up less than the markets as a whole, but also tend to fall less, when markets go down.
A Balanced Model Portfolio will normally hold a balanced mix of almost all major viable asset classes (for maximum diversification). In fact our Balanced Model Portfolio consists of circa 50% exposure into different types of managed bond funds and cash and the remaining 50% in a diversified range of managed equity funds. Both stable and volatile asset classes are utilized sensibly. Balance between achievement of profits and loss reduction is the main aim of this portfolio.
In most circumstances, returns from a Balanced Portfolio should outperform the returns achievable from a more conservative approach but may underperform the returns achievable from a higher-risk approach.
4. Growth
This strategy is ideal for an investor who can accept a good level of volatility risk within his/her portfolio. Within such a strategy your portfolio normally would outperform a basket of similarly weighted indices when the markets are up, whilst taking more downside risk than the markets when faced with market corrections. This portfolio holds more equities than conservative portfolios but less than aggressive ones. Therefore, this portfolio is composed of approximately 65% exposure in managed equity funds with the remaining 35% in managed bond funds and cash. Most growth investors want to accumulate a significant amount of wealth in the future, and are willing to bide their time for the rewards (and to recoup any short-term losses).
5. Aggressive
This risk profile is designed for individuals who wish to maximize returns in the upmarket and willing to tolerate significant volatility risk. Most aggressive investors either want to accumulate substantial wealth in the future, have enough income from other sources to fund their living expenses, and/or can wait to recoup losses possibly over the medium to long term. They should know they could lose substantial amounts in the value of their investment when markets go down, but also expect to profit greatly when they go up. Aggressive investors are typically younger, and intend to contribute relatively large amounts into the portfolio periodically over time through contributions coming from earned income.
The Aggressive Model Portfolio holds larger positions in equities than other lower risk allocated portfolios, with 70% to 90% of assets invested in equities and the remainder in fixed income and cash. This approach concentrates on achieving a good overall return on your investment with an aggressive approach but still avoiding the most speculative areas of the market. For example, exposure to small capitalised companies would still be very limited.
After considering all the options listed above, you should now be able to choose the Model Portfolio most suited to your needs and objectives.
It-Tolleranza tar-Riskju – It-tieni Parti
F’artikli preċedenti tkellimna fuq l-aspetti differenti tal-‘Model Portfolios’ u fuq dawk l-affarijiet li rridu nikkunsidraw meta niġu biex nagħżlu t-tolleranza tar-riskju u l-profil tagħna. Illum se nkomplu niddiskutu s-suġġett tat-tolleranza tar-riskju. Kif ġieli spjegajna, aħna lkoll individwi differenti u allura ma jistax ikollna strateġija waħda li tkun tajba għal kulħadd. Kull individwu għandu ħtiġijiet, għanijiet, ċirkustanzi u esperjenzi differenti. Dan il-kunċett hu importanti meta niġu biex ninvestu f’Portafoll ta’ Mudell ta’ fondi.
Hu hawhekk fejn tidħol l-għażla tal-profil tar-riskju personali ta’ dak li jkun. Il-profil tar-riskju hu influwenzat miċ-ċirkustanzi personali, mill-għanijiet finanzjarji u mit-tul ta’ żmien li nkunu nixtiequ ninvestu. Il-profil tar-riskju jgħinek tagħżel l-aħjar għażliet ta’ investiment għalik. Hemm min ikun ħerqan li jissogra ftit aktar ħalli jkollu potenzjal akbar ta’ dħul, u hemm min jippreferi inqas instabbiltà u allura jkun kuntent b’inqas dħul, imma bi dħul aktar stabbli.
Ma jeżistix investiment mingħajr riskju. L-investimenti kollha jħollu u jorbtu mat-tip ta’ riskji li l-aktar inti komdu u lest li tieħu. Portafoll diversifikat jista’ jgħinek tegħleb iċ-ċaqliq kbir li jkun hemm matul iż-żmien meta jogħla u jinżel is-suq. Huwa fatt magħruf li l-investituri ż-żgħar għandhom ġejjieni itwal quddiemhom, f’termini ta’ investimenti, u għalhekk għandhom mnejn jistgħu jittolleraw aktar riskju. Madankollu, l-individwi akbar fl-età aktarx li għandhom ġejjieni iqsar, speċjalment jekk ikunu rtiraw, u allura għandhom tendenza li jissograw inqas.
Il-Mediterranean Bank joffri ħames ‘Model Portfolios’ b’tolleranza ta’ riskju differenti.
1. Difensiv
Dan l-istil ta’ investiment hu maħsub għal dawk li jridu li t-tfaddil tagħhom jimxi pass pass mal-inflazzjoni. Din l-istrateġija hi mfassla għal min irid jillimita l-espożizzjoni tiegħu għaċ-ċaqliq tas-suq. Hu profil ideali għal dawk li mhumiex lesti jittolleraw “iċ-ċaqliq l-isfel tas-swieq”, u għal dawk li huma lesti jissagrifikaw il-potenzjal kollu li jista’ joffri ċ-ċaqliq il-fuq tas-swieq, biex jilħqu l-għan tagħhom. Għalhekk id-dħul fuq perjodu ta’ ħames snin – għalkemm mhux garantit – jista’ jkun inqas mid-dħul miksub minn profil ta’ riskju ogħla.
Dan il-Portafoll Difensiv, kawt ħafna, mill-Mediterranean Bank jiġi investit fl-aktar oqsma li ma fihomx riskju bħall-flus kontanti u l-bonds, u tiġi investita biss allokazzjoni limitata f’ekwiti jew ishma.
2. Konservattiv
Dan l-istil ta’ investiment hu maħsub għal dawk li jixtiequ li t-tfaddil tagħhom jissupera xi ftit l-inflazzjoni. Din l-istrateġija hi tajba għall-investituri kawti imma li jistgħu jittolleraw ftit aktar riskju mill-investitur difensiv. Il-portfolli konservattivi jista’ jkollhom telf limitat, għal żmien qasir, fi swieq dgħajfa imma jfittxu li jipprovdu tkabbir fil-kapital fuq żmien fit-tul. Dan il-metodu jikkonċentra fuq l-istabbiltà aktar milli fuq l-immassimizzar tad-dħul. Barra minn hekk jillimita ċ-ċansijiet ta’ instabbiltà sostanzjali fi żmien qasir. L-investituri tipiċi ta’ din il-kategorija jkunu nies li rtiraw mix-xogħol u li allura jiddependu mid-dħul tal-portafoll biex isostnu d-dħul tagħhom, nies li se jirtiraw dalwaqt, jew nies li fl-imgħoddi kellhom esperjenzi negattivi ta’ investiment. Dawn l-investituri jkunu jridu l-protezzjoni miċ-ċaqliq l-isfel tas-suq u jkunu lesti ma jipparteċipawx bis-sħiħ meta s-swieq jogħlew.
Il-portafoll konservattiv jinvesti primarjament fl-aktar oqsma li ma fihomx riskju bħall-flus kontanti u l-bonds, b’espożizzjoni modesta għall-ekwiti. Id-dħul ġenerali ta’ żmien medju għal żmien fit-tul, għalkemm mhux garantit, jista’ jkun inqas mid-dħul miksub minn profil b’riskju ogħla imma għandu jissupera d-dħul minn portafoll aktar difensiv.
3. Bilanċjat
Il-maġġoranza tal-investituri, tipikament, jagħżlu din il-kategorija tan-nofs u jfittxu l-bilanċ bejn ir-riskju u d-dħul. Fi żmien qasir, l-investituri b’din l-istrateġija jistgħu jesperjenzaw tkabbir tajjeb fis-swieq li jogħlew, iżda aktarx li jkun hemm ċaqliq l-isfel fis-swieq li jinżlu. Minkejja dan, fit-tul l-investituri jistgħu jesperjenzaw rata modesta u varjabbli ta’ dħul. Dawn l-investituri jkunu jridu dħul tajjeb u jafu li jkunu qed jieħdu ftit tar-riskju biex jiksbuh. Il-portafoll normalment jogħla b’rata inqas minn dik tas-swieq, imma ġeneralment jinżel ukoll b’rata inqas, meta s-swieq jaqgħu.
Il-portafoll bilanċjat normalment ikollu taħlita bilanċjata tal-klassijiet tal-assi vijabbli kollha ewlenin (għal diversifikazzjoni massima). Fil-fatt, madwar 50% ta’ dan il-Portafoll ta’ Mudell Bilanċjat tikkonsisti f’tipi differenti ta’ ‘managed bond funds’ u flus kontanti u l-50% l-oħra tikkonsisti f’għażla diversifikata ta’ ‘managed equity funds’. Il-klassijiet stabbli u instabbli jintużaw b’mod prattiku. Il-bilanċ ta’ bejn il-profitti u t-tnaqqis fit-telf hu l-għan ewlieni ta’ dan il-portafoll.
F’ħafna miċ-ċirkustanzi, partikolarment f’perjodi ta’ ħames snin, id-dħul mill-portafolli bilanċjati għandu jissupera d-dħul miksub minn investiment aktar konservattiv imma jista’ jkun inqas minn dak miksub minn investimenti ta’ riskju ogħla.
4. Tkabbir
Din l-istrateġija hi ideali għal investituri li jistgħu jittolleraw livell tajjeb ta’ riskju fil-portafoll tagħhom. Wieħed irid jaċċetta l-fatt li bi strateġija bħal din, il-portafoll normalment jissupera baskett ta’ indiċijiet simili meta s-swieq jogħlew, u jkollu aktar riskju meta s-suq jinżel. Dan il-portafoll fih aktar ekwiti jew ishma mill-portafolli konservattivi iżda fih inqas ekwiti jew ishma mill-portafolli aggressivi għax il-bqija tal-espożizzjoni tiegħu tkun f’bonds jew fi flus kontanti. Għalhekk, madwar 65% tal-espożizzjoni ta’ dan il-portafoll hi f”managed equity funds’ u l-35% l-oħra hi f”managed bond funds’ u fi flus kontanti. Ħafna mill-investituri li jagħżlu din l-istrateġija ta’ tkabbir ikunu jridu jakkumulaw ammont sinifikanti tal-ġid tagħhom fil-futur, u jkunu lesti jistennew għal żmien pjuttost twil biex jieħdu l-frott (u jirkupraw kwalunkwe telf li jkunu għamlu fi żmien qasir).
5. Aggressiv
Dan il-profil ta’ riskju hu mfassal għal min jixtieq iżid id-dħul tiegħu u lest li jittollera livell ta’ instabbiltà sinifikanti ta’ riskju. Ħafna mill-investituri b’portafoll aggressiv ikunu jixtiequ jakkumulaw ftit ġid sostanzjali fil-futur, ikollhom dħul biżżejjed minn sorsi oħra biex ifendu l-ispejjeż tal-ħajja ta’ kuljum, u/jew jistgħu jistennew biex jirkupraw it-telf, possibbilment fuq żmien medju jew fit-tul. Iridu jkunu jafu li jistgħu jitilfu ammont sostanzjali fil-valur tal-investiment tagħhom meta s-swieq jinżlu, imma jkunu jittamaw ukoll li jkollhom profitt kbir meta s-swieq jitilgħu. L-investituri aggressivi, tipikament, ikunu iżgħar fl-età u jkollhom l-intenzjoni li jikkontribwixxu ammonti relattivament kbar, perjodikament, fil-portafoll tagħhom b’ kontribuzzjonijiet li jkunu ġejjin mid-dħul li jkunu qed jagħmlu.
Il-portafoll aggressiv tal-Mediterranean Bank għandu pożizzjonijiet ikbar f’ekwiti minn portafolli b’inqas riskju u, tipikament, ikollu minn 70% sa 90% tal-assi f’ishma. Il-kumplament ikunu fi dħul fiss jew fi flus kontanti. Dan il-portafoll jikkonċentra fuq il-fatt li l-investitur ikollu dħul tajjeb mill-investiment tiegħu, b’metodu aggressiv, u fl-istess ħin xorta waħda jevita l-aktar oqsma spekulattivi tas-suq. Ngħidu aħna, l-espożizzjoni f’kumpaniji kapitalizzati żgħar xorta waħda tkun limitata ħafna allura xorta jkun hemm kontroll tajjeb u r-riskju ma jkunx esaġerat.
B’dawn il-fatturi kollha quddiemu, dak li jkun jista’ jikkunsidra b’mod għaqli liema hu l-aktar ‘Model Portfolio’ li jissodisfa l-ħtiġijiet u l-għanijiet tiegħu.