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Right fit for the conservative investor

Today we at Bourse continue our review of the three broad risk/return investor profiles – the Conservative, Moderate and Aggressive investor – with this week’s focus on the Conservative investor and a portfolio mix well suited for this investor type.
As outlined in our previous article, we provide a brief description on each of the risk/return profiles:

Conservative/Risk-Averse Investor
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 Conservative Investor
Like the moderate investor, the time horizon for this investor varies based on financial needs. The Conservative investor essentially chooses lower risk types of investments that may gain small profits but not be subject to great losses.
This type of investor is not willing to take speculative position with his/her money and prefers to avoid riskier investments like equities in some cases. Investors with lower levels of wealth, that is, their investment portfolio is a higher percentage of their overall wealth/net assets, may also opt for a more conservative portfolio to secure a more stable investment that will preserve their capital.
If you fit this profile, read on…
Keeping in mind our investment themes for 2014, as seen in Exhibit 1 and the key components of the moderate portfolio addressed in our last article, we take a closer look at the Conservative Portfolio.

The Conservative Portfolio
This type of portfolio is appropriate for investors nearing retirement, whose main objectives at this stage in life are capital preservation and income and the investor who by nature has limited tolerance for risk. A popular element of the conservative portfolio is an investment in a Retirement Fund/Pension Plan. Retirement Funds tend to maintain a fixed-income biased asset allocation in order to preserve capital, with modest growth through capital appreciation and income accretion. The ultimate objective of this portfolio component is to provide a stable stream of income to the investor upon maturity of the plan. This portfolio component is also convenient to the investor with limited time to manage his/her portfolio. Turning to equities, the Conservative investor’s portfolio should include quality or “blue-chip” securities in companies that have relatively stable growth, as well as consistent dividend policies. This could be achieved for you through a mix of indices and Exchange Traded Funds (ETFs) rather than direct stock selection. Like the moderate investor, exposure to US$ denominated investments should be maintained to offer the benefits of currency diversification.
We present our perspective on what a ‘typical’ asset allocation for a conservative portfolio could look like in Exhibit 2. This allocation is appropriate for investors who are prepared to accept lower returns in order to protect the value of their capital.
The asset allocation in the conservative portfolio reflects reasonably low risk for reasons mentioned earlier. The suggested portfolio mix for the conservative investor typically maintains a balanced asset allocation with a heavier weighting in fixed income instruments to preserve capital. As seen in Exhibit 2, the fixed income allocation of the conservative portfolio amounts to 73 per cent with 25 per cent allocated to equities compared to 50 per cent in the moderate portfolio.
The primary focus of preserving capital is achieved through higher fixed income investment allocation, which offers a predictable investment income stream. For the Conservative Investor, it often makes sense to have ‘hold to maturity’ investment grade bonds as this would minimise the impact price variations of such bonds during the holding period. In essence, fixed income holdings in the conservative portfolio emphasise higher credit quality, with a view to hold these assets until maturity.
Exposure to US$ will assist in protecting against any possible depreciation of the TT$ in the medium term. More importantly, US$ fixed income investments offer higher returns than yields on the local market bonds, which remain depressed. As seen in the conservative portfolio, US$ investments speak to 44 per cent of the portfolio, as compared to 50 per cent in a moderate portfolio.
Like the moderate portfolio, a model portfolio was constructed to reflect the returns an investor would experience if invested in a conservative portfolio. Key local and international indices were selected based on meeting the specific performance, volatility and correlation objectives of a conservative investor.
Based on our model portfolio as seen in Exhibit 2, an investment of TT$100,000 (exclusive of transaction charges) at the beginning of 2009 would have grown by 60 per cent by the end of 2013, to reach a total of $160,907.00. This equates to an average annualised return of 10 per cent.
On this evidence, it makes sense to expand your investment style to reap beneficial returns as seen in Exhibit 3.

CHALLENGES
Finding the right balance of risk and return for a conservative portfolio is one of the main challenges facing this type of investor. The current low interest rate environment is driving investors to look for other investment options that offer higher returns.
As illustrated above, the model portfolio would have outperformed any savings account or fixed income product such as the Government of Trinidad and Tobago 10-year bond that currently offers a yield of 2.58 per cent. Keep in mind that results typically vary in uncertain investing environments.
Your investment style is unique to you and your portfolio 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, email 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.
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