Tag Archives: Risk tolerance

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.

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.

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.