Tag Archives: risk

Ideas to survive with your investments in political risky times

Investments: bearish against bullish

The current year has been commented several times as a year in which political risks will play a role: Brexit, Trump, elections in France and Germany, amongst others. We usually think in other kind of risks when we speak about investments, but in this case it is possible that we have to consider the political factor.

Anyway, we want to obtain the best returns with the lower risk. How could you move your assets in 2017 with this scenario?

First of all, check yourself. No, we do not speak about your health, but about your financial needs and plans. Do your budget, organise a cash flow, analyse your expenditures and think about your financial goals.

Secondly, analyse quietly your portfolio. Is it correctly diversified? Have you recently checked the evolution and consider a rebalance? It is important to take into account that diversification is not a matter of number of securities or different kind of them (equities, fixed-income…). It has more to do with avoiding correlations and considering factors. What does factor here mean? Think about that you have different kind of securities from UK. If all your investments are connected with this country, you have the Brexit factor and this political issue will condition the returns. That needs a wide view over the reality.

Thirdly, in order to choose the best assets for your portfolio in uncertain times, remember to check some figures, as:

  • Trading volume and liquidity: it is very relevant that the asset has a high trade rate and it is easy to sell, in order to avoid counterparty risks.
  • Volatility: the higher it is, the higher is the risk that you have to deal with deep price changes.
  • Past performance and bootstrapping: it is true that past returns do not guarantee future ones, but an analysis of the past trend combined with a forward testing with a bootstrapping tool can be helpful to select better securities for your portfolio.
  • Correlation with its benchmark: this is quite important, even more if the market is risky.

Finally, the main rule for investors in uncertain times (as we are living now) is common sense. Invest only the money left, not the amount to pay your mortgage, think about how regular and safe are your incomes and be reasonable with your goals.

Risk and volatility: they are not really the same

risk and volatility in T-Advisor screener

We often read comments about the high volatility of any asset, as it would be a sign of a high risk. That is not necessary true, because you can find different assets with similar volatility and different returns: some positive and some negative.

Volatility reports about the variation of an asset price in a certain period or the deviation of its returns from the average. A high volatility suggests strong ups and downs in the asset price. That means for current investors that it is more risky, as they can lose money more quickly… but they can obtain also higher returns.

The question is that volatility is not a measure of risk taken as an only figure. It has to be linked with other measures. For instance, you have to watch the liquidity, because an illiquid asset is more risky, as it is more difficult to sell and obtain your money back.

Volatility also reports about the past, because it is the mirror where you find the information about what happened with the prices till today. You cannot obtain other information about risk. For instance, it does not report about the counterparty risk, let’s say, you invest in bonds and the issuer has no money to pay your coupon. To obtain those data, you have to look at other parameters.

The list of risk is long, but you cannot perceive them through the volatility. It is very important for investors to understand the difference, as many get good returns trading with the volatility of the asset. As we commented above, it can be an opportunity.

A relevant measure for the risk is the Value at Risk, also known for their initials VaR, but you have to watch also the diversification (in the case of a fund or your own portfolio), the correlation with other assets or the liquidity. To sum up, if you consider the volatility as the only way to control the asset risk, you will make a mistake. The risk analysis is a combination of several figures that have to be linked to obtain a global perception.

Is my portfolio working or not?

Portfolio main screen in T-Advisor

Investors organise efficiently their investments in portfolios. That’s the rule, but the question is: how to follow up my portfolio? Can I preview somehow troubles in my investments? Which ratios should I take into account to set and allocate my assets?

There are some indicators that give us some clues whether we are right or wrong and the changes we have to decide:

  • Returns: of course, this is the first one. As investor, you do not have to be anxious about the short term, because volatility is our current rule. You should use a tool that provides you different terms in order to compare the evolution. However, you have to think about changes if the returns are negative in the middle term.
  • Comparison with other references: it is a good idea to compare the evolution of your portfolio with the benchmarks (an index or a smart benchmark). This comparison will help you evaluate a proportion of the profits or losses that you get and diminish or underline the importance of the result. For instance, if your portfolio losses 3% and your benchmark losses 5%, it is not so bad. You are better than the index, although you should consider change your strategy, it the negative trend intensifies.
  • Diversification: get charts about the proportion of the assets in your portfolio related to regions, currencies and asset category. A diversified allocation will help you avoid several risks.
  • Risk: this is actually the second most important indicator after returns. Analyse the volatility, the value at risk (VaR) and the risk contribution of your positions. A segmented analysis will focus better your next decisions. Should I keep, sell or buy? Another quite important figure is the Sharpe ratio to understand how interesting is assuming risks in order to obtain certain returns.
  • Trend: you should as investor use tools to get the portfolio trend, if bullish or bearish.
  • Portfolio and investor profile consistency: is your portfolio consistent with your investment profile, your risk tolerance and your expected returns? That is another question that you have to ask yourself.

You need tools to make a full analysis and obtain a whole view over your portfolio and take the best decisions to improve your results. It is important that you get unbiased indicators, watch risk and returns, understand everything and take rational decisions, never guided by a short term situation. At the end, it is not only about profits, but above all capital preservation. The T-Advisor platform offers these figures so that everyone can set and allocate assets their own portfolios in the most efficient way.

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.

T-Report, a high quality asset report as an investment tool

Figures and data are the main tool for investors to obtain good performances, but people don’t need only a collection of numbers, but an interpretation of them. Figures are useful when they are understood and let investors take decisions. In T-Advisor, we care about it with our T-Report, a full and detailed sheet with accurate and relevant data about thousands of assets. Let’s see what an investor may find there with an example: Apple.

First of all, you find the immediate figures about the stock: price, price change, volume, an assessment of the risk taking into account the volatility, the liquidity and our score. T-Advisor has developed its own scoring for all assets to provide investors an understandable way about the quality of them.

After that, you find the historical performance analysis. It is true that past performances do not guarantee future ones, but they show a relevant evolution to assess the interest for your strategy.

T-Report main figures

The following data are related to short-term trend. The system calculates the trend and the cycle phase to perceive if it is the right moment to enter (stay long) or wait, as the position says.

T-Report trend analysis in T-Advisor

Charts are also very relevant to perceive an asset trend. We provide in our T-Report several options to watch the chart and the evolution in the last five years. Anyone who wants to obtain deeper information may click on “View charts in charting area”.

T-Report charts in T-Advisor

Comparative tables are also useful to evaluate data. That is why we show the cumulative performance and different views from different technical models.

T-Report technical analysis in T-Advisor

Similarly, every T-Report compares the asset with the index reference to check if it performs better or worse. It also shows relevant figures as alpha and beta. It is to underline that the T-Report is full of hints that explain the meaning of all the data just locating the cursor on them.

T-Report risk and index comparison

In T-Advisor we consider that capital preservation is the main goal for an investor. The chapter devoted to risks analysis is wide, because we want to report properly about them to help investors preserve their capital. Volatility, VaR and retracement are the main figures. We also include a comparative chart that links performances and volatility from the assets and several indexes.

T-Report risk analysis in T-Advisor

Finally, if you are not satisfied, T-Report shows investment alternatives ranked by exchange and sector, so that you can find the one that fits your interests.

T-Report investment alternatives in T-Advisor

To sum up, investing is not a game. It requires time to analyze where we are going to allocate our money. Information is a main stuff to assess options and take decisions, but this information has to be properly and systematically organized. Our T-Report is the answer for these needs.

 

Risk and investments: an inconvenient marriage

Risk and investments

If there is a sure word always linked to investments, it is not performance: it is risk. All investors try to reduce or avoid it. Nobody wants to lose their money, but it is possible, because there is a long list of dangers to deal with. Let’s begin:

  1. Interest rate risk: it affects to fixed-income investments, as bonds. Its value decline if the interest rate increased. Currently, central bank rates are extremely low, but it will take a long time till the curve change the trend.
  2. Currency risk: some investments are made in foreign stocks or bonds, or directly in currencies. Well, the exchange rate plays a big role to decide if you were right with your decision.
  3. Business risk: all business has a common risk, because they can fail and suddenly the investors discover that the company is in bankruptcy. It can also affect to a whole sector. Think about the banking sector around 2007-2008…
  4. Market risk: as a result of the movements in the markets, it can happen a downturn in your investment. Pity, you have chosen the wrong share or the wrong bond.
  5. Inflation risk: sometimes we are too conservative, because we want to avoid a failure, but prices increase and our investments have a lower performance compare with them. We are losing purchasing power. Some people call it “the risk of avoiding risks”.
  6. Liquidity risk: this risk is linked to the counterparty. What if the company or the country has no cash to pay your dividends or your coupon? It is worse when your investments are in funds and the manager has no money for redemptions. This risk also refers to the inability to sell your asset. Think about properties…
  7. Personal risks: your life is a continuous risk and you need money to deal with them. Sometimes there are special situations (from happy ones, as a wedding or the purchase of a car, till unpleasant ones, as illness or accidents) in which you need to redeem your investments, but it can happen that the market situation is not the best one.
  8. Tax risks: with the current high shortfall in the developed countries, tax increases have been sometimes the immediate solution. Suddenly, your tax plans for your investments go to the trash.
  9. Political risks: tax risks are also in this item, but it also includes other government decisions and laws, as restrictions in investment products or in markets.
  10. General risk: we live in an ultra-connected world. This does not only mean Internet, but political events. Do you remember the market impact of the 9/11? Or the Iraq war? Or the Asian crisis at the end of the 90s?

Is it possible to avoid them? No, absolutely. There are two chances to partly control and reduce them. The first one is good information, not only previous to the investment, but also as long as you keep it. Being well reported is a key to survive in this risky world. The second one is diversification. You can fail in a part, but success in the other. Could you mention other investment risks?

Alpha and beta: Greeks in my portfolio

Two main concepts in the modern portfolio theory are the alpha and beta measures. They give the investor some information about the asset (a share, a fund, an ETF, for instance) risk compared with its benchmark, but both are quite different.

alpha y beta in T-Advisor

f we take our T-Advisor screen and choose an asset (for this case, Vestas Wind System), the T-Report from it has a chapter titled “Relative performance vs index”. We already wrote about  correlation. Now, let’s explain what alpha and beta are and why they are important references for investors.

Alpha shows the outperformance of the asset compared to its benchmark for an assumed risk. In the picture, the figure is 0.0197. That means: this asset performs better than the reference index. The higher, the better. This additional performance has to do with other reasons not linked with the benchmark. This measure appears also for funds and portfolios. A way to discover if the fund manager is good is just looking the alpha.

What about beta? In this case, this figure measures the volatility or how much the asset varies in its price when the benchmark moves up or down 1%. If it is positive, the asset varies in the same direction as the benchmark. If it is negative, the variation is the opposite.

For instance, in the example above, beta is 1.27. This means that the asset is more volatile than the index: when the index changes 1%, the asset does 1.27%. If the ratio would be less than 1, that means that the asset has a low volatility.

This is the theory, but what about the practice? Just remember some ideas:

  1. Look for positives alphas but beware the beta together, because beta points how much risk you are accepting.
  2. For bullish markets, look for assets with high positive betas.
  3. On the contrary, for bearish markets, choose low or negatives betas. In this last case, the correlation is inverse.

In all cases, the investor is choosing the risk exposure. T-Advisor provides the figures. How much you are exposed is a question of your own decision.

Danger: correlated assets

Correlation is a statistical concept. It shows the relationship between two variables. In our case, it measures if two or more assets move in the same direction when one of them changes. For instance, if you have two companies from the oil sector in your portfolio, it is very possible that both increase their prices at the same time, if the oil barrel is more expensive.

However, it is difficult to detect for many investors. Very correlated assets in the portfolio increase the risks of losing money. It is similar to put all the eggs in the same nest. But there are some helps to avoid these risks. The first one is the correlation ratio. It varies between -1 and 1. If the figure is near to 1, there is a high correlation. If it is near to -1, there is an inverse correlation (when the price of one asset changes, the other changes in the opposite way). If it is near to 0, there is no correlation.

Portfolio with figures of correlation in T-Advisor

The assets in the picture have a high correlation. This portfolio is very risky. A defensive proposal would look for non-correlated assets or even with inverse correlated.

A second hint to detect correlations is diversification. It is important to have a good asset allocation. VaR also provides some clues, over all if you have the “Diversification benefit” tool. We have already published a post about it.

Diversification benefit and portfolio risk charts in T-Advisor

T-Advisor has also a tool that measures the portfolio diversification and suggests changes to reduce the risks.

Diversification ratio in T-Advisor

Last idea to discover correlations and take decisions to avoid it is the portfolio optimization. T-Advisor has the tool “Optimizer” to find correlated and non-correlated assets. The tool recommends positions to be reduced or enlarged. So, the investor has the chance to improve the risk and performance.

Optimization portfolio in T-Advisor

To sum up, correlation is a measure about our portfolio risks and our diversification. A high correlation is always a warning signal, because it is possible that you get a positive trend in a period, but… what about if the trend is negative?

Portfolio optimizer: a tool to improve your investments

Investors organise efficiently their portfolios to obtain the highest returns, but a portfolio has to be followed up, because some adjustments are sometimes necessary. The problem is how to detect the best changes to get the profit goals. That is why T-Advisor developed the tool “Optimizer” for this target.

Optimizer T-Advisor

In the Optimizer, the investor can choose the expected return and volatility depending the term (shorter or longer), as the percentage of acceptable volatility and the weight limits per assets. Clicking on the “optimize” button brings the results.

From the beginning point and the chosen settings, the tool calculates different parameters. The efficient frontier is a visual comparison between the current position and the optimal one, linking volatility and performance. The investor can also learn which assets should be changed in their weight to optimize the returns.

At the end, investors have a helpful tool to adjust their portfolio and adapt their assets to the changing market. What are the main advantages of this tool? Well, first of all, it lets combine different risk limits (volatilities) with different terms of expected returns. The result is that the investor can choose amongst different possibilities depending his or her interests or circumstances.

Secondly, it is helpful to discover correlated and non-correlated assets. With this information, the investor can reduce the risks and maximize the returns. Moreover, the tool lets the investor decide about which positions should be enlarged and which should be reduced to obtain the targeted performance.

To sum up, T-Advisor Optimizer is an easy visual tool that reports the investor about the changes to be done in the portfolio to get the best results. The main advantage is that the tool has different settings available so that the investor can choose which one fix to their particular requirements: the freedom in one click.

Portfolio score : your investing mark

Portfolio score by T-Advisor

When we were students, we received marks from the teachers in the exams. Sometimes it went fine, others not so good. In any case, the mark was an easy reference to know if we had passed or not. Why not using it in personal finances? That is the portfolio score in T-Advisor.

T-Advisor, as software mainly thought to control and organize individuals’ investments, was designed to be easy to understand for everyone, either the person had deep financial knowledge or not. We conceive the portfolio score as a personal reference that reports about the quality of our investments related to some measures. The marks are between 0 (the worst) and 10 (the best).

Portfolio score improvement suggestions in T-Advisor

How do you receive your mark? T-Advisor accounts:

  • Diversification: the more diversified portfolio with more positions, the better, as you reduced your risks.
  • Trend: a good score has a bullish trend, against a sideways or, even worst, a bearish.
  • Risk: T-Advisor compares your risk profile against the general portfolio risk. The system defines a risk range for every profile. Think about you are conservative and your portfolio risk is high: something goes wrong and you receive a low score.
  • Performance: as before in risks, T-Advisor establishes a range for the investment profile expected return. If the portfolio return is in it, it marks. If the return is nearest to the highest point in the range, your mark will be also higher.

T-Advisor suggests the investor possible improvements in every measure. For instance, as we see in the picture above, it recommends a review of the bearish positions. How can the T-Advisor user find new investment ideas? Searching in our “Market opportunities” tool or looking at in every position report (our T-Report) some alternatives that the own system suggests.

Create your own portfolio and discover these tool functions!