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Right fit for the moderate investor

Today we at Bourse take a look at the first of a three-part series that seeks to match different types of investors to their preferred investment style. Investors typically fall into one of three broad risk/return profiles—Conservative, Moderate or Aggressive. This week we focus on the Moderate investor and a portfolio mix well-suited for this investor type.

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.

When choosing how to invest, you should always consider five factors, namely your investment objectives, investing time horizon, tolerance for risk, personal investment experience and overall financial situation. Having taken all of this into account, you should now be in a better position to determine the types of investments best suited for your specific goals and objectives.

Profile of the Moderate Investor
Having described broadly the investment objectives of the Moderate investor above, we look at the other factors behind this type of portfolio allocation. The time horizon for this investor varies, but generally falls within a range of 10 to 20 years. A longer investing time span allows the investor and his portfolio to bear higher levels of capital fluctuation, with there being more ‘recovery time’ for the portfolio’s investments.
The tolerance for risk is higher than the conservative investor. For example, the moderate investor may be comfortable with a 10 per cent short-term drop in the value of his assets, knowing that the investment time horizon is sufficiently long for potential recovery. Personal investment experience determines which types of asset classes the client may be comfortable with holding in his portfolio.
Less experience in investing typically leads clients to be comfortable with more popular classes of assets such as equities and bonds, whereas more sophisticated investors are willing to include commodity and alternative investments in their portfolios. The moderate investor tends to stick more closely to equities and bonds, with a higher allocation toward equities.
Finally, the overall financial situation of the moderate investor is also quite varied. One common theme across all moderate investors however, is that their investment portfolios can be left invested for a reasonably long period with generally predictable cash flows and without significant capital withdrawals. In other words, the moderate investor does not rely exclusively on the investment portfolio for meeting living expenses and other financial commitment.
If you fit this profile, read on…

The Moderate Portfolio
As part of our investment themes for 2014, we proposed the following guidelines as seen in Table 1 given local market conditions and the international outlook.

We present our perspective on what a ‘typical’ asset allocation for a moderate portfolio could look like in Exhibit 1. This allocation is appropriate for investors willing to accept modest risk to gain higher long-term returns.
The asset allocation in the moderate portfolio reflects a tempered risk appetite for the reasons mentioned earlier. The suggested portfolio mix for the moderate investor typically maintains a balanced asset allocation to preserve capital while generating long-term capital appreciation.
In this portfolio, 45 per cent is allocated to bonds, 50 per cent to equities and five per cent in cash. The fixed income investments offer a predictable investment stream while preserving capital. For the equities allocation, the investor can take on more risk by investing in growth stocks to benefit from both dividend income and capital appreciation.
Exposure to USD will assist in protecting against depreciation of the TTD and help to generate higher returns as yields on the local market remain depressed. As seen in the moderate portfolio, USD investments speak to 50 per cent of the portfolio.
A model portfolio was constructed to reflect the returns an investor would experience if invested in a moderate portfolio. This was based on key local and international indices which were selected based on meeting the specific performance, volatility and correlation objectives of a moderate investor.
Based on the returns of indices selected, if TT$100,000 was invested at the start of 2009, those funds would have grown by 61.8 per cent by the end of 2013 to reach a total of $161,839.94.
Clearly, given local market conditions, it makes eminent sense to expand your investment time horizons to reap beneficial returns as seen in Exhibit 2.

CHALLENGES
Investors may not have the time and/or the necessary knowledge to manage their investment portfolio efficiently and effectively. One of the main challenges to realising your portfolio is access to currency and stock selection. When looking for someone to assist, look for a reputable and long standing investment house such as Bourse, who will be able to execute on the local, regional and international fronts on your behalf.
As illustrated above, the model portfolio would have outperformed any savings account or fixed income product available over the time period. It is worthwhile noting that results typically vary in uncertain investing environments. However, the moderate investor’s investment time horizon is usually sufficiently long to navigate periods of unfavourable investment cycles. The key to a successful portfolio is asset allocation, security selection and diversification. Next time, we shall examine the portfolio of a conservative investor.
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.
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