Tag Archives: asset allocation

My goal in bearish markets: capital preservation

Markets are currently very volatile. We have lived a strong bearish period, but it is not sure that the bulls are coming, as the trend is not clear yet. In this case, panic is the worst adviser. On the contrary, investors have to analyse properly their portfolios to take right decisions. If you are not a trader, if you are a long-term investor, then you have to assume that it is difficult to avoid losses in some periods, moreover when all markets are dropping. So, your goal has to be another: capital preservation.

What does capital preservation mean? Your goal as investor must be to keep your assets with the less possible losses or, of course, to obtain benefits. As there are many changes in the long term, then you have to concentrate your worries in the bearish times: how much are you losing? The success is not to lose or lose less than the reference markets, but how can you get that information? The answer is smart benchmark.

Smart benchmark chart in T-Advisor

The picture above is very clear: my portfolio is losing, because I have invested in a market that is going hard into negative, but I only lose -2.4%, while the reference market (the smart benchmark) loses -14%. Not bad, huh?

As we regularly say, it is important to have available the right tools to analyse your investments and take decisions. Capital preservation has to be your first goal. Don’t lose money or lose the least. Then it the bullish times, your goal has to be to outperform the reference market.

The following chart is even clearer:

Portfolio risk figures

My Germany portfolio is much better than the benchmark: quite less losses in a bear period, less volatility and better Sharpe ratio.

What other tools do I have to consider risks in order to preserve my capital?

  • Analyse how your positions contribute to risk your portfolio. In this case, you can find out if you have an uncomfortable asset to be substituted.

Risk contribution chart in T-Advisor

Risk profile comment with portfolio risk in T-Advisor

  • Consider the diversification. In bearish periods, diversification is a great help to avoid hard losses. You can analyse it with the diversification benefit, that compares how much you win if your portfolio has different assets:

Diversification benefit in T-Advisor

  • Look at the Value at Risk, which measures the probability of having a certain level of losses. As you can see, my portfolio has the worst VaR, what means that I have to consider some changes in my allocation to avoid future losses.

Portfolio risk table in T-Advisor

All these figures will help you to understand your current position and risk. Then you can decide if you have to rebalance totally or partially your portfolio. The strategy is clear: keep your capital and set your portfolio to lose less in bad times and outperform the benchmark in growing times.

The tools that you need to invest efficiently with your portfolio

Think about that you have a portfolio. Fine, you have organised your financial target into a structured composition of stocks, bonds or any asset that agrees your investor profile. However, you are a motivated investor and have interest in monitoring, improving, analysing… and you do not find the right tools to do it.

What kind of tools do you need? First of all, you need a platform that lets you easily create your portfolio with simple steps and implement your assets from your own Excel file or directly on the system. It is important that you can select properly your profile since the very beginning.

T-Advisor tools: screen to create your portfolio

Once you have created your portfolio and included the assets, you need to monitor and analyse it. It is not only about different timeframes for performance or volatility, but also an analysis of the diversification and the risks. As investor, you should take into account that one of the main goals is capital preservation. This means that a right investment strategy should outperform the benchmark in bull periods and have substantially less losses in bear periods. Diversification benefit, which assets contribute more to risk or a comparison with the composite benchmark (or smart benchmark, as it is denominated in T-Advisor) are useful tools for it.

T-Advisor risk analysis screen

This analysis should also include a graphical analysis of the allocation to understand the risk concentration in different concepts.

T-Advisor asset allocation analysis

And finally, what refers to analysis and monitoring, you should have access to a kind of scoring to perceive the quality of your portfolio and some suggestions to improve it.

T-Advisor scoring and suggestions screen

In the case of you perceive that your portfolio needs an improvement, your platform should include a tool to analyse where the troubles come from and optimise the results. The optimisation has to propose an efficient frontier for the portfolio allocation and a proposal of what changes you should implement.

T-Advisor optimiser tool

Efficient frontier optimisation in T-Advisor

And, last but not least, you need an alert system to react when there are deep movements in the markets that affect your portfolio. Your platform should also provide you a system to set the alerts depending your own needs.

Alerts setting in T-Advisor

T-Advisor is your alternative to create, monitor, optimise and modify efficiently your portfolio in a self-directed way. There are many platforms, but they usually have less tools or under payment. You can choose T-Advisor for free to feel the investment experience and control your finances on your own.