Category Archives: T-Advisorpedia

The full cycle in financial planning

Generation of proposals are part of the financial planning

Life is difficult to plan, but it is necessary to have some plans in certain circumstances. Plans cannot avoid troubles or negative surprises, but they can help deal better with them. This is the case of financial planning. What is it? The European Financial Planning Association (EFPA) explains that it “is usually a six-step process, and involves considering the client’s situation from all relevant angles to produce integrated solutions”.

The main target is knowing the customer in order to organise his or her finances for the whole life, so that the person reach his or her goals, keeps a similar standard of living and can manage unexpected events. The six steps listed by the EFPA are:

  • Establishing and defining the client and personal financial planner relationship.
  • Gathering client data and determining goals and expectations.
  • Analyzing and evaluating the client’s financial status.
  • Developing and presenting the financial plan.
  • Implementing the financial planning recommendations.
  • Monitoring the financial plan and the financial planning relationship.

Financial planning deals with all kind of assets (from cash to deposits, stocks or real estate) and life situations (worker, self-employee, retired, heritage). The main points are:

  • What are the main goals for the customer: is he or she planning to buy a house, save for the studies of the children, keep money with some annual returns for the retirement? We have to consider the age, the professional and the personal situation. Demands are not the same if the person is married or single or have one or several children.
  • What is the time horizon: after considering the goals, we have to think about a realistic time horizon to reach them. It will not be the same the timeframe for a house or for a car.
  • What is the risk profile: this is one of the main pillars, because the financial planner will propose the investment in appropriate assets. A conservative investor cannot receive a proposal with a half of the investments in stocks, for instance. There are several tools to profile investment risks, as the regulations are becoming harder to protect individual interests.

Individual investors can ask for the advice of a financial planner or be more independent using tools to organise their own plans. T-Advisor financial planner is one of the possibilities. What does an investor have to ask to this kind of tools?:

  • A chance to select different goals and time horizons.
  • An analysis of your risk tolerance.
  • A result with a range of possibilities from the more optimistic to the more pessimistic.
  • An analysis of tax and inflation effects.
  • A proposal of a combination of assets to reach your goal taking into account your risk tolerance and the time frame.

Nobody knows the future and financial planning will not avoid shocks. That is part of life. But financial planning can help organise your goals with a realistic view and react wiser to those shocks in order to keep a regular standard of living.

Model portfolios, the fashion product in investments

Model portfolios in T-Advisor

Model portfolio is one of the main fashion concepts in investments. They are mentioned everywhere and the roboadvisor trend has underlined them as a standard solution to offer easy and cheaper investment products with interesting returns.

In T-Advisor, model portfolios are far from being something new. We saw it clear since the beginning three years ago. One of our modules is specific to provide two different kind of them: ETF portfolios divided in different risk profiles and share portfolios divided in different markets.

Our modeling strategy is based on quantitative calculations. These are complex mathematical models that help detect investment opportunities mixing several indicators, as historical returns, volatility, trend, alpha, VaR, correlations… the data cocktail depends on the developer and the strategist, who work together to find the appropriate composition of this data mix in order to obtain the most interesting assets and the best performance.

In our case, our model portfolios play with two criteria: best performance and capital preservation. We look for good returns to overperform the market, but we also reduce losses compared with the reference indexes in bearish periods. To keep these goals, we review every second month the model portfolios to rebalance the assets that are not working as we wish.

Model portfolios are easy for customers: the structure is clear, they are based on a disciplined strategy and changes are seldom, in order to make adjustments in certain periods. However, they are not easy products for the companies that offer them, because they need strong calculation systems, as we have developed in T-Advisor. In addition, we cannot say that the machine work alone, but wealth managers monitor also the process, creating the strategy and analyzing possible changes. Although model portfolios are linked to roboadvisor, they are not totally robotic and they are used by traditional investment houses.

Model portfolios are flexible, because the wealth manager can design them taking into account different diversification, risk, assets, currencies or geographical areas. They are also easy to explain to investors, because they look like bespoke boxes.

Take a look at one example in T-Advisor: our Mexico portfolio, composed by 10 local shares. The 1-year performance was 22.69%.

Mexico model portfolio in T-Advisor

The Mexican IPC index had a 1-year performance of… 0,46%.

Mexican IPC index performance

This is a clear example of how a model portfolio works. Individual investors choose them because they are easy to understand and wealth managers, because they are easy to explain. Communication plays a very important role in finance and easy products provide more trustworthiness.

ETF, the asset revolution has consolidated

Exchange Traded Funds, or ETF by its initials, are the trendy security in the last years. Their assets have doubled in the last five years, as this BlackRock chart shows, although there is a reduction in January 2016, because of the general volatility of the equity markets:

Global ETP assets by year. Source: BlackRock

ETF are there to stay. There will be no reversal. In this short history (although they exists since the end of the 1980’s), there have been a few entities that have specialised in creating and selling these products: iShares by BlackRock, Vanguard and State Street, as the following table shows:

Global ETP providers. Source: BlackRock

But why are ETFs so successful? Why is there an offer from a few to 1,800 different products in so short period of 10 years? Flexibility, low fees and trading like stocks are some of the advantages against traditional mutual funds. Although there are also some disadvantages, investors still look at them as a very attractive asset. The explosion of them as a business contributed to create a long list of specialised media in Internet, because professionals and individuals have been looking continuously for information about them.

The design of an ETF is very different depending the cases: equities, fixed income, money market, commodities… They replicate an index or track a collection of securities or sectors in the known as passive management. After creating the product, there are only some adjustments every certain period, but the product performs independently of the manager.

In T-Advisor, our Watchlist has a long list of ETF categorised by their strategy for our registered users:

T-Advisor ETF Watchlist

It is just an option, but it is interesting to consider because of its price transparency linked with diversification. You invest in a diversified product, that means that you reduce some risks, and you have steady information of the price fluctuation, against mutual funds, whose prices are updated when markets are closed. In costs, they are cheaper than mutual funds. Yes, they are more expensive that a share, but you have to consider the above-mentioned diversification.

This is probably the reason of the success: the combination of the flexibility and transparency of a share and the diversification of a mutual fund. A survey conducted by EY in 2014 already talked about the promising future of ETFs amongst wealth managers and invertors. That future is already here.

Roboadvisors: the word that is changing finances

Roboadvisors : T-Advisor mobile app picture

Roboadvisors or roboadvisers, with an O or with an E: the name began as derogatory, but it has been finally adopted by the different providers that operate in this field. This is the trendy word in financial technologies (or fintech, as it is also known).

The concept is simple: with the technological evolution, algorithms have been developed to create portfolios and manage them automatically or with a very low human intervention. Traditionally, a financial adviser has met the customer, listened their needs and creates a personal portfolio linked to a financial plan. In the case of roboadvisors, the customer register, fill in a investment risk profile questionnaire and the system proposes a model portfolio. This portfolio changes (what is known as rebalances), through algorithms, in order to improve the results when markets are negative. Easy: you invest and the machine works.

The immediate and clearer effect is about the price: fees are very low. Technology has opened a wide door for low-cost services with a very high quality and finances are not absent of this trend. Roboadvisors are the solution for little investors that have not enough funds to be worthwhile for advisers but look for better returns that traditional banking products, as deposits. In addition, investors feel the control of their investments, as they have a 24/7 platform with attractive web interfaces or mobile apps. The have also more advantages, as we have already explained.

Why are the fees so cheap?

  • The staff is very short.
  • The portfolios are composed by ETF, which are a kind of funds simple, transparent and with low fees.
  • The products are massive portfolios. There is no personal portfolio, as traditional advisers make, but one for different risk profiles.

The list of players is long and the assets under management (AuM) are growing quickly: an AT Kearney report mentioned that AuM managed by roboadvisors would reach $2.2 trillion in 2020. Currently, the largest roboadvisors manage $3 billion. That´s why the biggest players in the financial branch, that initially rejected them, are developing or event buying roboadvisors: Schwab and Vanguard have developed its own solutions, BlackRock and Invesco bought roboadvisor companies.

In the case of T-Advisor, there is a mixture of self-directed tools for investors that prefer to manage their full investments on their own and a model portfolio module as the existing portfolios in the roboadvisors. And all for free.

The map is changing: investors look for more technological, autonomous and cheaper solutions for them. Roboadvisors were criticised, because customer wouldn´t have anybody on the other side of the phone in the case of a crisis. We are living currently hard times in the markets. Let’s see what the financial landscape brings just at the end of the year: more or less roboadvisors? More or less AuM managed by them? Positive or negative returns for the customers?

What are the main technical models to analyse a share or fund? (Part 2)

We have already commented some technical models to take into account when you invest (link a post). Moving average and Bollinger bands describe the general trend, but when should I invest or go out? Do I have any signal? There are technical models that specifically report about it.

MACD crossover

MACD are the initials or “Moving Average Convergence Divergence”. It helps us follow the trend, but mainly to check if it is the right moment to buy or sell. If the fast MACD line crosses below the slow MACD line, it is a signal to buy. Otherwise, if it crosses above, it is a sell-signal. For instance, if we look at the chart, we find that the fast line (green) cut below the slow one (blue). Afterwards, the stock chart shows a positive trend. We discover then a momentum for the security.

T-Advisor chart with MACD

Relative Strength Index (RSI)

This momentum indicator compares the magnitude of recent gains and losses to determine overbought and oversold conditions of an asset. Then a investor can detect quick turns in the security to decide whether he or she has to sell or buy. The RSI expresses as a percentage. If it is over 70%, it is overbought. If it is under 30%, it is oversold.

T-Advisor chart with RSI

Stochastic crossover

It shows the relative position of a closing price to the price range in a certain period. It is used simultaneously with the MACD to detect trends and triggers.

In T-Advisor, we show a comparative table of different technical models to indicate if it is the right moment to stay long or out.

T-Advisor table with technical models

Technical models are a reference to take decisions about investments, but not the only one. In T-Advisor, we prefer to offer several sources and indicators in a deep report so that investors have a global view about the stock or fund. With the suitable helps, these reports are a definitive compass to select the best assets for a portfolio.

What are the main technical models to analyse a share or fund? (Part 1)

Investors have usually two options about how to analyse an asset. These are fundamental and technical analysis. The first one focuses on the company, its balance, its sales and benefits or the market share in its business. The second just look at the share price and its movements, which are organised in patters for them.

The technicians or chartists have developed several measures to take into account when they analyse an asset. These are some of the most important:

Moving average

It is the most usual to analyse a chart. A moving average is the average price of a security over a set amount of time. It removes the effect of the day-to-day fluctuations and allows investors to find the real trend and react to get it or go out from a share. There are several types: simple, linear and exponential, but the SMA or Simple Moving Average is the most common. It can have different periods: 7 days, 50 days, 200 days… For instance, the 200-day-SMA is commonly used to find deep trends and the 7-day-SMA is extended for short-term trends. In T-Advisor, we use a composed SMA by a short-term and a long-term simple averages.

Chart with moving average in T-Advisor

Bollinger bands

These bands developed by John Bollinger place volatility lines above and below a moving average (usually a 20-day-SMA). The more volatility the asset has, the wider are the bands. The usefulness of them is about the signals, when the daily movements cross the upper or lower limits. Investors have to check different patterns to find if the next movement will be upwards or downwards. There are 16 different patterns as the lines cross the upper line as they cross the bottom line. Let’s see an example in T-Advisor.

Chart with Bollinger Bands in T-Advisor

These are some of the technical references that investors use to find out the trend of a security and take their next decisions. You can see more details in all the T-Reports in our database.

Why central banks are relevant for you, investor?

When you read the newspaper, you find always news about the Fed, the ECB, the BoE or the BoJ. These are the initials of the most important central banks: the Federal Reserve in US, the European Central Bank for the euro-countries, the Bank of England in Great Britain and the Bank of Japan. This year, another bank has emerged because of the influence of its decisions in the global economy: the People’s Bank of China.

What are these banks? They are not commercial banks, but they have relevant tasks for the economies. The origin of each is different: for instance, the Fed was created before de WWI after a deep banking crisis; the ECB is the result of an agreement amongst the countries which use the euro as a currency…

What are the main tasks? Well, central banks have the monopoly of printing money. Due to this responsibility, they control the monetary policy through the main instrument: the interest rate. This regulates the amount of money in the system. They are also lenders of last resort for commercial banks. Of course, the tasks can be wider depending the country. For instance, if the currency is pegged to another, they decide also the exchange rate.

Why do they have such influence? Governments delegate the monetary policy in these institutions. They usually have the mandate of controlling the inflation. This is the main role for the ECB in Europe. The mandate of the Fed, on the contrary, is double, because it has to take into account not only the inflation, but also the economic growth. Decisions have to be taken in order to achieve both.

As an investor, why are they relevant for me? You surely have heard the news in August about the drop of the stock exchanges. The origin was in the sudden decisions of the People’s Bank of China, which devaluated the yuan three times in three days. The worldwide effects can be perceived in this chart:

T-Advisor chart with the impact of the devaluation of the yuan in the stock exchanges last August

This is not the only example. The exchanges follow continuously the steps of these banks, as the interest rate has a relevant influence in the evolution of the economy or the companies. For instance, it is expected that the Fed tightens this year its monetary policy increasing the interest rate. The debate has been continuous since the last year and keeps on. As a result, the S&P was quite unstable in the last 12 months. It is relevant the drop before Christmas, when the Fed met for last time in 2014:

S&P evolution in the last year

The relevance of the Fed is also huge in the commodity markets, as they are nominated in dollars. In the case of the ECB, it has built an own vocabulary. It was famous with the former president Jean-Claude Trichet that the increase of the rates was announced two months before saying that the institution was “vigilant” with the price evolution and a month before saying “very vigilant”. The bank prefers to be foreseeable in order to avoid sudden market movements. Current chairman Mario Draghi was also famous, because his words defending the euro stopped the instability over this currency in 2012.

In any case, you, as an investor, should watch what the central banks say. If you are a trader, follow every word. If you are a long-term investor, take care of the statements to rebalance your portfolio in certain moments.

Investment risk: some figures to watch in the assets

Risk chapter in a T-Report in T-Advisor

When you are an investor, you accept some risk. We have already written about the different kind of risks in investments. The question is: can we measure the risk? Well, risk is a qualitative ratio, but we can obtain some clues through quantitative measures.

Volatility is one of these measures. Does it mean that high volatility is the same as high risk? It depends on the asset. First of all, volatility does not measure the risk, but the price variation in a certain period. If there is a high diversion from the average price, it is very volatile. Of course, it is risky, as far as the prices change sharply and the investor can win or lose suddenly. However, think about another asset, as housing. Prices are no so volatile, but it is risky, because you have another risks: counterparty risk, inflation risk…

The liquidity grade is also important to measure the risk, as an investor can perceive how often the asset is purchased or sold. A low liquidity shows that the asset has a high risk that you cannot find a buyer when you want to sell it.

One of the most important measures for risk is Value at Risk, broadly know by its initials VaR. This index shows how much an investor can lose at the most with a probability of 95% in a certain period. The higher is the figures, the more risky is to lose money.

Correlation offers also a clue about the risk. This figure has a range between -1 and 1. In this case, the asset is compared with another asset, with its sector or with the reference stock index. If the correlation is 0 or near to 0, there is no correlation. If is 1 or near 1, there is a high correlation: the asset moves following the trend of the reference. On the other side, if is -1 or near -1, there is an inverse correlation: the asset moves in the opposite trend of the reference. This is very useful for negative waves, for instance.

As you can see, risk has no concrete measure. You have to look into figures to discover if the asset is risky and if the risk level of the asset is acceptable for your profile. The T-Report in T-Advisor gives full details about all the data about risks that an investor need to know to take decisions.

Investor: watch these figures to select your assets

You are a new investor or with low experience in investments. You have available a good database to check possible asset to invest in, but which would be the right one? How can you select the most interesting assets for your goals? We recommend you to look into a database with high-quality reports about the assets. There you will find lots of information. Check the following figures to take a decision:

Figures to follow in investments

  • Performance: look at the historical performance. How good were the returns in the last months? And in the last years? It is true that past performances do not guarantee future results, but it show a trend about the long-term stability. It is not the same to get a share with positive and negative returns in different years than a one with regular positive returns.
  • Volatility: this is quite important. Volatility measures a deviation from a middle point. For instance, if the price goes up 4% one day and goes down 3% the following, the security is quite volatile. On the other hand, if the price goes up 0.2% three days and goes down 0.1% one day, it is less volatile. Take it into account depending your risk profile: if you are risk averse, you will not feel comfortable with a share that has high variations every day.
  • Trend: it is the development of a security in a timeframe. You have to consider the recent trend to decide to invest or not. A trend has a slope. If the slope is strong, it means that the trend has accelerated. For instance, if the slope is strong upwards, it can mean a bubble or that there is speculation behind the movement. On the other hand, if is very negative, it can mean a crisis in the company.

Chart to follow investments

  • A historical chart: an image is worth more than a thousand words. It is easy to detect the items mentioned above in a chart. The best one is an active chart where you can choose different timeframes.
  • Value at Risk (VaR): this is an advanced item, but very useful. What does it measures? The probability of losses in a timeframe. You will read “VaR one week” or “VaR one year”. It indicates that you can lose at maximum the written figure with a 95% probability. In other words: if you invest in that asset, you can earn, you can lose less than the indicated figure in the VaR, you can lose at maximum that figure with 95% probability and you can lose more than that maximum with 5% probability. These are the scenarios that you have to analyze. The highest VaR it is, the highest risk you accept.

This is the beginning. There are some more that we will comment in future posts. The T-Report in T-Advisor offers all these data. Check it in our platform.

Are you an investor? Here are some advices

Thinking about investments? Some advises by T-Advisor

Are you an investor? How long have you been investing? Maybe recently? You should have to take into account some advices to avoid any fail:

  1. Analyze your risk tolerance. That is the first step in T-Advisor. You have to answer some questions to know your behaviour related to the chance of losing money. Some people are very risk averse and their profile is conservative. Others are more aggressive and accept more fluctuations. This profiling is very important to decide the products you are going to invest in.
  2. Decide the amount of money you invest. How to decide it? Analyze you incomes and expenses. You should have always money to cover the regular expenses, set some apart for unexpected expenses and some cash. With the money left, you can decide your investment. We underline this: invest always the money that you do not need for regular expenses. The amount is not very important: you can begin with $1,000 (or euros, pounds or the currency of your country).
  3. Set a goal and an investment horizon. Why do you decide to invest? Do you think in a car, a house or a long-term investment for your retirement? Be realistic. Do not build any false dreams. Patience is an investor attitude: results are not coming from one day to the next.
  4. Learn something about finances. No, we do not recommend you to attend a postgraduate or read think handbooks (you may do it, of course), but you have to become familiar with some expressions: performance, returns, volatility, trend… T-Advisor has several hints to make these concepts understandable. This vocabulary will help you take better decisions, as you will be able to look for appropriate products.
  5. Find the right platform for your interests. The market offers now several ways to invest. There are self-directed platforms to invest on your own in products as shares, funds and ETFs and set your portfolio. Others offer model portfolios depending on your risk profile. In T-Advisor, you have both. Select the one in which you feel more comfortable.
  6. Be wary with news and experts. Do not let be influenced by sudden events, market fluctuations or positive/negative comments from experts. Investment is a long-term way. You can be a day-trader, but that is a job in its own. We speak today to current people with some money left to invest. Follow your strategy, target your goal and do not react with panic. Fluctuations are usual. Of course, you should rebalance every certain time to adjust your portfolio, but not according with sudden reactions. That will not avoid losses. On the contrary, it maybe creates more than you would like.

These are simple but effective advices for investors. We will soon write about the most important concepts to take into account when deciding a product to invest in.