Given the volatility in financial markets, we must not underestimate the power of portfolio management. Have you ever thought what steps you need to take in order to develop a winning investment portfolio? It’s never too early to start building an investment portfolio on the two main components; acceptable risk & asset allocation because there’s no telling what sort of a flux economies and investment markets will be in tomorrow.
A high-risk investor would be willing to tolerate potential volatility of up to 35% -50%, while a risk averse investor would want to be protected from adverse moves in the value of his portfolio to maximise his potential gains. However, since all investors have a unique level of risk tolerance that varies with age, income and financial goals, they themselves are better judges of their level of risk tolerance. One can attempt to ascertain their level of risk tolerance via various questionnaires to identify the portfolio swings they can withstand and yet, be able to sleep at night.
SCBPL conducted a study in 2017, “The Race to Save”, on the saving habits of 8,000 emerging affluent consumers from 8 different countries to identify how they are preparing for tomorrow which indicated that a majority of people in Pakistan tend to have a traditional and overly simplistic approach towards savings, example storing at home, saving under their mattresses or putting it in saving accounts. This looming savings gap threatens the spending power of a large group of investors who could otherwise take the advantage of basic wealth management strategies and increase their savings by an average of 42% over 10 years.
In today’s era of digitization and advancements, rather than staying focused on traditional means of savings and investments, investors should build a well-diversified portfolio, which will ensure that the risk is maintained at desirable levels and consists of an assortment of investment products that would help reduce unsystematic risk of a single security portfolio.
“From my earlier failures, I knew that no matter how confident I was in making anyone bet I could still be wrong – and that proper diversification was the key to reducing risks without reducing returns. If I could build properly diversified (they zigged and zagged in ways that balanced each other out), I could offer clients an overall portfolio return much more consistent and reliable than what they could get elsewhere.” – Ray Dalio
Stocks and bonds play different roles in an investor’s portfolio. To start with the basics and moving away from the traditional methods following are some of the modern options of investment available in the market:
* Equity Fund, also known as Stock Fund, principally invests in stocks and is an ideal investment options for investors who do not possess large amounts of investment capital or are not well versed with the investment world. The major advantage for investors is the reduction in risk due to the diversification of investment (portfolio management done by professional fund managers) and relatively lesser capital investment required to become an investor.
* A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. In return, the investor gets interest on the loan, and the entire loan amount is paid back either on a specific date (known as the bond’s maturity date) or at a future date of the issuer’s choice. The length of time to maturity is called the bond’s term. Generally, the less stable the issuer, the higher the interest rate it will pay. That’s because the issuer has to make it worthwhile to investors, given the greater risk that a less-stable issuer will default on its bond payments. Treasury bills, are considered the safest of all. Typically, the longer the bond’s term, the higher the interest rate it will pay.
* Bancassurance is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base.
Investment in Bancassurance not only provides the clients with protection and savings but also with wealth creation in terms of higher allocation and cost effective products and tax savings.
“What the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments…. we don’t know that we’re going to win. We have to have diversified bets.” – Ray Dalio
Opting for an extreme position might seem tempting to many investors however, it is rarely advisable as the “sweet spot” appears to exist with a mix of investment options. The decision to combine various asset allocation strategies or choosing one depends upon the investor’s risk tolerance, age, financial goals and the market situation. Opting for a mix and making the strategy less vulnerable to unforeseeable moves would produce stable returns however, at the cost of a lower compounding rate making the allocation more palatable.
Muslim Reza Mooman, "Financial independence through portfolio management," Business Recorder. 2018-10-23.Keywords: Economics , Fixed income investment , Professional fund managers , Financial markets , Potential volatility , Interest rate , Capital investment