Right fit for the aggressive investor
Today we at Bourse present the final of the three broad risk/return investor profiles i.e. the Aggressive Investor. This week’s focus will outline a portfolio mix well suited for this investor type.
As outlined in our last two articles, we provide a brief description on each of the risk/return profiles:
This investor’s main investment objective is preservation of capital and generation of income, with limited focus on capital appreciation.
Moderate Investor/ Risk-Neutral Investor
This investor is prepared to generate moderate returns with a reasonable level of risk, focusing more on capital appreciation but also income generation.
Aggressive Investor/ Risk-Tolerant
This investor is willing to take a high level of risk. The focus for this investor class is almost exclusively capital appreciation, with the willingness to take concentrated portfolio positions to achieve this objective.
Profile of the Aggressive Investor
From the Bourse perspective, this investor is focused on achieving maximum returns and willing to invest in higher risk investments to allow for the potential of higher long-term growth. These investors aim to achieve positive real rates of return, understanding that the value of their portfolio can fluctuate significantly and are comfortable with this.
Investors in an aggressive portfolio do not necessarily require immediate cash from their investment account and, with a very high risk appetite, are willing to be heavily weighted in higher risk securities which can maximise returns.
With a primary investment goal of capital growth, capital preservation is secondary to this investor with a willingness to accept a higher risk in the pursuit of medium to long-term gains.
If you fit this profile, read on…
Referring to our investment themes for 2014, (Exhibit 1) and the key components of the conservative and moderately aggressive portfolios addressed in our two previous articles (Exhibit 2), we take a closer look at the Aggressive Portfolio.
The Aggressive Portfolio
While there may be varying degrees of the aggressive investor, the main goal is to obtain long-term growth capital. Naturally, this portfolio would consist mainly of equities and equity-like investments, unlike that of the Conservative portfolio which is largely weighted toward fixed income (Exhibit 2) and the Moderately Aggressive portfolio which exhibits a greater balance of equities and fixed income.
We present our perspective on what a ‘typical’ asset allocation for an aggressive portfolio could look like in Exhibit 3. This allocation is appropriate for investors who are prepared to accept a considerable amount of risk and that the value of their portfolio can vary significantly with market movements in the short-term.
The portfolio mix for the aggressive investor would be heavily skewed to equities in order to take advantage of capital appreciation opportunities. Smaller components of the portfolio would be placed in fixed income assets. Alternative investments would also feature in this portfolio, consistent with the capital appreciation goal. As seen in Exhibit 3, the equity allocation of this aggressive portfolio could amount to 70 per cent, with up to 15 per cent in alternative investments and 15 per cent in fixed income.
The primary focus of capital growth is achieved through equity allocation, where investments are made in stocks that offer attractive value in the medium to long-term. These stocks may be considered more risky, as they tend to be smaller and lesser known companies. There are also larger, well-known companies that may offer attractive value and are considered more risky (for example, Google and Apple). These companies tend to be higher beta stocks, which imply that their prices fluctuate more relative to the general market.
The fixed income holdings in the aggressive portfolio may be of lower credit quality as these tend to carry higher yields reflective of the risk associated with the bond.
Like the moderate and conservative investor, exposure to US$ will assist in protecting against any possible depreciation of the TTD in the medium term. More importantly, US$ fixed income investments offer higher returns than yields on the local market bonds, which remain depressed. In the aggressive portfolio, USD investments speak to 63 per cent of the portfolio which may include investments in non-traditional asset classes such as alternative investments.
Alternative investments are usually considered in an aggressive portfolio as their returns tend to have a lower correlation with those of standard asset classes. Alternative investments may include non-traditional asset types such as hedge funds and other investment vehicles focused on real estate, commodities and currencies. The trade-offs however, are lower cash flow investments (in the case of commodities) and lower liquidity (in the case of hedge funds and real estate).
Based on our model portfolio as seen in Exhibit 3, an investment of TT$100,000 (exclusive of transaction charges) at the beginning of 2009 would have grown by 66 per cent by the end of 2013, to reach a total of $165,900.48. This equates to an average annualised return of 10.7 per cent.
On this evidence, it makes sense to expand your investment style, should you have the appropriate risk appetite, to reap beneficial returns as seen in Exhibit 4.
An aggressive stock portfolio may be more suited to assertive investors who understand and accept the fluctuations, especially on the downside, to their portfolio. As illustrated above, the model portfolio would have outperformed any savings account in the long-term, but not without its volatility as market conditions vary.
As stated before, your investment style is unique to you and your portfolio and will depend on your particular risk appetite/profile. Look to sophisticated, independent investment advisors - such as Bourse - to help you in crafting a portfolio tailored to your needs.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 628-9100, e-mail us at Research@boursefinancial.com or visit us at any one of our three offices located in Port-of-Spain, Chaguanas and San Fernando. Investors can also visit our website at www.bourseinvestment.com or Bourse Securities Limited Facebook page.