Tag Archives: Risk profile

What does portfolio optimisation mean?

Think about your portfolio. It does not perform as you would like and you do not know how to implement changes to improve the returns. Should you read all kind of reports? Of all possible assets? That’s nonsense. There should be a method to optimise and change efficiently your portfolio. There is actually and method: portfolio optimisation.

When we talk about it, it means the process of choosing the weights of different assets for your portfolio in order to obtain the best possible returns compared with similar portfolio compositions or risk profiles. The main measures taken into account are the expected returns and the expected volatility. Optimisation systems include limits of accepted volatility and weight per assets.

The system is linked to the Markowitz Efficient Frontier model that pretends to guide your investments maximizing your performances and reducing the risk. The main point that supports this model is choosing low-correlated or uncorrelated assets. Smart diversification is the idea behind it. An efficient portfolio means a well-diversified one.

Portfolio optimisation efficient frontier

Optimisation systems are professional tools to improve the portfolio results, but it has been implemented in T-Advisor for individuals. It is not easy, because you have to play with the following indicators:

  • Asset correlation
  • Maximum volatility
  • Expected return
  • Maximum weight per asset

The smart combination of the four indicators provides the success of the investment. They can change depending on your risk profile, but accepting a higher risk does not mean being suicidal.

Portfolio optimisation result charts

There is also another very important point: the costs. If you optimise your portfolio and follow the results of the optimiser tool, you have to rebalance your portfolio. A rebalance means trades to buy and sell in order to compose the portfolio following the optimisation indications and… it has costs. However, we have to remind that investments are for long-term and rebalances should be executed every certain time. In these cases, costs can be balanced out with the improvement of the returns. If you are a day trader, then forget this, because you are other kind of investor.

The results of the T-Advisor model portfolios in 2016

T-Advisor, as wealth management solution for individuals and professionals, has not only tools for own investments, but also proposals to follow or even copy. That’s why our system has its own model portfolios. They are nine: five related to risk profile (from aggressive to very conservative) and five related to countries (Germany, UK, Spain in Europe and Mexico and Nasdaq 100 in the Americas).

How do they work? We select between four and six ETFs for the risk-profiled portfolios and up to ten stocks for the country portfolios. The main point for us is capital preservation. That’s why our results, when they are negative, are better than the markets. To obtain those results, we rebalance the portfolios every two months. These rebalances let us improve the results, as we exclude the positions more affected by market negative waves and substitute them for better stocks or ETFs. Diversification is also part of the strategy. We select the securities with the best score and relevant figures to obtain the best results.

These are the results for 2016 for our risk-profiled model portfolios:

1-Y-return 2016 1-Y-return 2015 Volatility Sharpe ratio
Aggressive

5.85%

-2.53%

12.51%

1.51

Dynamic

5.29%

1.47%

11.14%

1.52

Balanced

1.79%

3.53%

6.18%

1.42

Conservative

2.68%

1.52%

2.82%

1.35

Very conservative

0.90%

0.80%

2.07%

0.55

The figures were collected on January, 2nd, and we compare the results of 2015 and 2016. There is a general improvement (except the balanced strategy, although it is positive anyway). We have to remember that the year was quite unstable in the markets, as there have been several surprises that affected negatively. Despite this instability, none of our strategies closed with negative returns.

And now the results of our country portfolios:

1-Y-return 2016 1-Y-return 2015 Volatility Sharpe ratio Index
Germany

41.37%

44.70%

14.01%

6.98

6.87% (DAX)

Spain

1.31%

5.74%

16.17%

2.13

-2.01% (Ibex)

México

14.58%

23.96%

13.98%

5.61

+6.20% (IPC)

Nasdaq 100

24.68%

2.97%

9.58%

4.71

+7.50% (Nasdaq)

UK

9.03%

18.32%

15.99%

4.69

+14.43% (FTSE)

Except the UK portfolio, our strategies outperformed their benchmarks, but even the British one obtained a quite good return. The best performer was the German strategy again and the worst was the Spanish, but in this last case, the benchmark Ibex finished with a negative result.

Learn more about our portfolios and the assets included in our platform. Aren’t you tempted to clone them? We have a tool to let our users do it. Let’s try it and compare the results with your investments!

Risk profile matters to build your portfolio

Basic risk profiling test in T-Advisor

Risk profile matters for investors. It is relevant information, because anybody has the same standard to resist the market changes. When we speak about risk profiling, we mean a process for finding the optimal level of investment risk for an investor, considering three items:

  • Risk required: risk associated with the return required to achieve the investor’s goals from the financial resources available.
  • Risk capacity: the level of financial risk the investor can afford to take.
  • Risk tolerance: the level of risk the investor is comfortable with.

The three components are different faces of the same process. For instance, you can be very aggressive in investments (risk tolerance), but without very much money to invest, because you are very engaged with different kind of expenditures, as a mortgage or children (risk capacity).

Investment authorities in different countries have developed several standards to test the risk profile for individuals and these tests are required to banks, wealth managers and financial adviser with their customers. These tests ask for the experience, the knowledge and the strategy. An individual with low knowledge and experience in investments cannot begin with complex products, because the risk of losing a huge amount of money is very high.

Risk profile means that individuals and their investments have to agree the same standard. From this perspective, the usual range comes from very conservative to aggressive. Usually, conservative investors prefer a lower performance if their portfolios suffer less changes and tend to keep their investments for a long term. Aggressive investors choose always a higher performance, although the assets suffer more changes and they have more probability to loss their money. They also look for short or medium-term investments.

What are the recommendations for conservative risk profiles in order to build their portfolios? Fixed-income assets (bonds, fixed-income mutual funds), cash, deposits and, if they are a bit biased to equities, the best are liquid stocks that pay dividends. On the other hand, aggressive profiles will look for equities (even in risky countries, as emergings or frontier), short-term assets and derivatives. They can provide high returns, but you can also loss everything.

What is the main recommendation over the ones above? Every investor has to honest with himself to accept his profile. If you lie yourself, you can be at a very high risk in investments. That is why you have to fill in a risk test, before you put your money in any adventure.

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.

The results of the T-Advisor model portfolios in 2015

T-Advisor, as wealth management solution for individuals and professionals, has not only tools for own investments, but also proposals to follow or even copy. That’s why our system has its own model portfolios. They are nine: five related to risk profile (from aggressive to very conservative) and five related to countries (Germany, UK, Spain in Europe and Mexico and Nasdaq 100 in the Americas).

How do they work? We select between four and six ETFs for the risk-profiled portfolios and up to ten stocks for the country portfolios. The main point for us is capital preservation. That’s why our results, when they are negative, are better than the markets. To obtain them, we rebalance the portfolios every two months. These rebalances let us improve the results, as we exclude the positions more affected by market negative waves and substitute them for better stocks or ETFs. Diversification is also part of the strategy. We select the securities with the best score and relevant figures to obtain the best results.

These are the results for 2015 for our risk-profiled model portfolios:

1-year-return Volatility Sharpe ratio
Aggressive -2.53% 19.44% 0.57
Dynamic 1.47% 16.86% 0.51
Balanced 3.53% 10.03% 0.58
Conservative 1.52% 3.94% 0.90
Very conservative 0.80% 2.39% 0.18

The figures where collected on January, 13th, and they are influenced by the very bad trend in the last weeks. However, the only negative result is our Aggressive portfolio and the losses are lower if we compare them with the 1-year-returns of some of the main exchanges: S&P (-4.42%), London (-8.80%), Madrid (-9%), Hong Kong (-17.96%).

And now the results of our country portfolios:

1-year-return Volatility Sharpe ratio Index
Germany 44.70% 19.89% 6.23 2.08% (DAX)
Spain 5.74% 18.28% 1.59 -9.00% (Ibex)
Mexico 23.96% 15.03% 5.09 -1.81% (IPC)
Nasdaq 100 2.97% 18.52% 3.27 -2.44% (Nasdaq)
UK 18.32% 14.72% 2.98 -8.80% (FTSE)

Our strategies outperformed the reference indexes and even in a negative environment, all performed positively, against the negative results of the indexes.

Aren’t you tempted to clone them? We have a tool to let our users do it. Let’s try it and compare the results with your investments!

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.

Investment exercise: planning for a car or for holidays

We usually think that investments should have a purpose for big matters, as retirement or housing, but we can also organize them to other goals: a new car, because you need it to go to work, or dream holidays with your family for a special event. Why not? It is your money and you decide how to spend it. But before you must plan how to save and where to allocate your investment.

T-Advisor investment planner will help you do it. First of all, you have to answer some questions, mainly:

  • How much money you need to save
  • The timeframe you plan to save that money
  • How much you already have and the monthly amount for the plan

Planning for a car in T-Advisor investment planner

Be realistic about you ability to save depending your incomes and taking into account possible unforeseen events. You should always have some funds for these circumstances. As you have answered these questions, our planner will ask you for your risk profile. Are you risk lover or risk averse? The more risk, usually the more chances to obtain higher performance, but also to suffer dramatic drops. When you think about it, be aware of the proportion invested in equities, as it is the compass to evaluate the risk. For instance, we will select the moderate profile:

Planning for a car in T-Advisor investment planner: risk profile

We finally obtain the result. It is an expected projection. In this case, the result reports that the chances to achieve the goals are between 50% and 75%. The projection reports not only about the expected evolution (that takes into account historical behaviours), but also the best and worst scenarios.

Planning for a car in T-Advisor investment planner: projection

You can always change the parameters to obtain a new answer. This flexibility helps you learn about your real chances. Be honest yourself and then you can get the plan that suits your situation. In the advanced settings you can also implement the inflation and taxes effects.

Last step proposes you a possible portfolio with a proposed allocation in different sectors. No specific product is recommended.

Planning a car in T-Advisor investment planner: proposal

Similarly, you can do the same exercise for dream holidays, for you children studies or for health needs. Our investment planner helps you organize your financial goals easily and with flexible tools, so that financial planning will be in everybody’s hands.

T-Advisor model portfolios: these are our results

T-Advisor, as wealth management solution for individuals and professionals, has not only tools for own investments, but also proposals to follow or even copy. That’s why our system has its own model portfolios. They are nine: five related to risk profile (from aggressive to very conservative) and four related to countries (Germany, UK, Spain and Nasdaq 100 from US).

How do they work? We select between four and six ETFs for the risk-profiled portfolios and up to ten stocks for the country portfolios. They are not static, but we rebalance them every two months. These rebalances let us improve the results, as we exclude the positions more affected by market negative waves and substitute them for better stocks or ETFs. Diversification is also part of the strategy. We select the securities with the best score and relevant figures to obtain the best results.

These are the results for 2014 for our risk-profiled model portfolios:

1-year-return

Volatility

Sharpe ratio

Aggressive

17.77%

10.94%

1.84

Dynamic

20.03%

9.91%

1.99

Balanced

19.50%

5.57%

2.84

Conservative

17.84%

2.06%

4.89

Very conservative

14.02%

0.62%

5.81

Who said that very conservative strategies have very low returns? And now the results of our country portfolios:

1-year-return

Volatility

Sharpe ratio

Index

Germany

20.84%

10.94%

1.84

2.65% (DAX)

Spain

9.31%

9.91%

1.99

3.66% (Ibex)

Nasdaq 100

1.91%

5.57%

2.84

18.8% (Nasdaq)

UK

-0.59%

2.06%

1.89

-2.71% (FTSE)

Our strategies outperformed the reference indexes (with the exception of Nasdaq 100), but even in a negative environment, as in UK, our portfolio reduced the losses.

Aren’t you tempted to clone them? We have a tool to let our users do it. Let’s try it and compare the results with your investments!

Investment exercise: saving for a house

Your house, your apartment… that is part of your life and your worries. Where to live? What can I pay? How can I manage to save money and buy that house I have seen in an ad? Let’s begin with a plan. When a person takes a financial decision, he or she should not improvise, because he or she has many chances… to fail. A plan is necessary: how to organize my savings? Any projections? What about the inflation effect?

T-Advisor has developed an investment planner for up to 7 different investment plans. Let’s try out with housing. First of all, you have to answer these questions:

  • How much money do you want to save to buy your house or flat?
  • How long are you going to save?
  • How much money do you have already for this goal?
  • How much do you expect to save every month or every year?

Investment planner first screen in T-Advisor

Be realistic, look up your accounts, sum up the whole information for yourself and begin to fill in the fields. Let’s put an example: Your house costs averagely 200,000 euros. You need around 30% of this amount, because you are going to ask for a mortgage with a credit limit of 80% of the price, but you need some more money for taxes and associated expenses. So, you need around 60,000 euros. You are married, so two people contribute for the goal with 900 euros monthly: your expectation is that you reach it in 5 years, because you have already saved 15,000 euros.

With these figures, our investment planner will ask you about your investment profile: how risky are you? You want to avoid high risks, but you are aware that a very conservative profile will perform slower. So, you choose “moderate”.  If you are not sure, you can answer a short test.

Risk profile T-Advisor investment planner

Finally, you have a chart that reports you about the chance that you have to reach your target. In this case, it is greater than 95%. The chart reports also about neutral and pessimistic scenarios. These figures are obtained through statistical calculations based on historical data. You can always set the parameters to evaluate other cases. You have also advanced settings to evaluate inflation and taxes effects.

Investment plan T-Advisor

Last screen shows you a possible allocation of your initial contribution to your investment plan with a projection about highest annual gains and losses.

Investment allocation plan T-Advisor

Your wished house can be easier to buy if you develop your own plan. This is the reason why we offer these tools for free, so that everyone can access to professional solutions to success in their financial decisions.