It is likely that we have repeatedly heard that the investments or instruments that we operate in the financial markets depend on our profile. But what does this really imply? In general terms, it can be described as the degree of willingness of the investor to tolerate risk, that is, his ability to accept losses in search of higher returns.
It is crucial to establish the relationship between the risk and benefit of a investment. In an environment of uncertainty – as the world is today as a whole – the profitability of an investment is uncertain, which implies that when investing, we are assuming risks. These may include unforeseen changes in the economic situation, regulatory or political modifications that affect the chosen investment, natural catastrophes, among others.
Although risk aversion is the key factor that determines an investor’s profile, there are other relevant aspects to consider. Among them are the investment time horizon, personal financial situation and investment knowledge.
Taking these factors into account, we can mainly identify three profiles:
- Conservative investors: Their main objective is to preserve the value of their money, which is why they tend to have a low willingness to take risks. They prefer “security” to uncertainty, even if it means lower returns.
- Moderate investors: They are willing to tolerate a certain level of risk in order to obtain slightly higher returns. They do not usually make impulsive decisions, but tend to balance their portfolio with fixed income instruments and some variable income.
- Aggressive investors: They are the least fearful of risk. They seek to obtain the maximum possible return, no matter how exposed they are. They are generally inclined towards variable income instruments and/or financial derivatives.
Now, in general, all ALyCs and financial advisors tend to offer different investment portfolios for each profile. This is important, since each investor is different and not all financial instruments are for everyone. However, in these investment portfolios we will be able to identify some assets that are essential for each of them:
Conservative investor profile
For a conservative portfolio, an interesting instrument is to invest in Common Investment Funds (FCIs). These are financial vehicles that allow a group of people with similar investment objectives to have professional management that implements the necessary strategies to achieve those objectives, while the assets in which they are invested are guarded.
Among the main advantages for investors are the ease of access and the simplicity of its operation. They do not have an expiration date and their daily value is public. Its liquidity and the diversification of its portfolio help to minimize risks, which is clearly attractive.
FCIs, due to their structure, provide access to alternatives that retail investors would not otherwise be able to obtain. Today, within this universe, you can find various options for hedging against inflation (CER funds) or the exchange rate, and even alternatives to the traditional fixed-term deposit, with the advantage of having practically immediate liquidity.
Moderate investor profile
On the other hand, for a moderate portfolio, fixed-income instruments, such as bonds or bills, are essential. Basically, a bond represents a loan that the buyer or holder (also known as a bondholder) grants to the issuer (either the State or a private entity), who pays interest periodically and repays the principal on a pre-established date. The bond creates a financial obligation for the issuer.
At the time of issuing a bond, the amount, currency, interest rate (fixed or variable), the form and date of interest payment, as well as the conditions and dates of capital amortization are specified. For this reason, bonds are considered fixed income instruments. Bond buyers know from the start what the return on their investment will be.
Although this seems like a safe investment, in reality the bonds are low or moderate risk (depending on the circumstances) and also have certain implicit aspects that depend mainly on the creditworthiness of the issuer. For example, US Treasury bonds are considered virtually risk free, while bonds issued by some national governments have much higher risk, but also offer a higher return. The same occurs with Negotiable Obligations (ONs), which are bonds issued by private companies and whose potential risk depends on the credit rating of the issuing company.
Aggressive investor profile
Finally, an aggressive portfolio is characterized by including variable income instruments, such as shares. These represent a part of the property of a company and are owned by the shareholders. Having shares of a company grants rights and obligations to the holder. Among the rights are the right to vote at the shareholders’ meeting, access to information about the company, receiving dividends or the possibility of selling the shares that are available. Among the obligations, the shareholder must assume losses if the company does not obtain good results.
The risk in investing in stocks is that the company will not perform well. This can cause the value of the shares to decline in the secondary market, as many shareholders will choose to sell their positions.
Due to the law of supply and demand, when there is a greater supply of shares for sale, the prices go down, while when there is a greater demand for shares, the prices go up. This causes the price of a share to fluctuate constantly in the market. Therefore, stocks are more volatile and riskier instruments.
In summary, each investor has an associated profile that depends on his risk aversion. Depending on that profile, you are going to invest in different instruments that suit your expectations, however, the recommendation is always to consult with our financial advisor which is the portfolio that best suits our objectives.
Head of Digital Account and External Asset Managers of ppi.
Source: Ambito
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