Determining What Kind of Investor You Are (Part 2)
A Professional’s suggestions on How to invest for your character
How does an investor balance his or her portfolio with the risks?
Richard Flax, chief investment officer at Moneyfarm, suggests: ‘We will adjust the contents of the portfolio according to the investor profile. That essentially requires adjusting the values of higher risk assets (such as, equities and commodities) and lower risk assets (including, government bonds and cash).
The risk exposure in an asset changes according to how a client responds to risk, allowing a target level suitable for every profile.
Any investment approach must look forward and backward, considering various risk metrics, such as volatility and drawdown, and creating portfolios founded on projected gains and past risk parameters.
Why diversification and time are important
Investors need to diversify but must avoid being overly diversified. Many people in the UK invest in a single stock or just a few stocks, depending only on a few firms and experiencing great volatility.
On the other hand, one can shift to the other extreme and have plenty of funds that provide the same objective, adding complexity, increasing costs and, in the end, not giving the desired gains.
You have no other choice than to take greater risks. No free rides in the process. Your money can rise or fall; determine where you are in the picture where you are comfortable. Go for the long-term duration.
Which type of investor are you really?
Consider these professional suggestions:
First, the right time frame -- with more time you have the potential to build more wealth through compounding and the lower the risk of short-term loss.
Determine also how you respond to loss, or volatility. Although volatility means nothing to an ordinary client – since performance is the main concern – how do you respond when the portfolio value drops?
Also, find out whether you are a nervous investor by asking yourself how often you check your portfolio.
A very important task is to educate yourself about the financial markets, as this determines how much you comprehend investing.
Lastly, how much do you possess? If you own several properties and have no mortgages, your capacity for risk is much greater as your will only lose a small amount in comparison to your wealth.
Looking forward and backward at the same time provides an advantage to the investor. As professionals, we aim for various degrees of risk based on what a client reveals to us and in what category of investor they fall into.