Undoubtedly, there are lots of good investments in the markets today. The key is to determine which ones are best for you. No investment is good if it brings you sleepless nights. Similarly, an asset is not for you if its rate of return or growth is not high enough to meet your goals and objectives.
To start, there is no simple test or formula that can exactly reflect the kind of investor you are. Current events as well as your mood and attitude toward investments in general will determine your profile. For example: If you are an adventurer searching for dynamic opportunities, then remember that the search for higher returns carries an extra measure of risk. It you are an active investor who is willing to take calculated prudent risk to achieve greater financial gains, your investment universe should be more diverse.
Finally, if you are an income-oriented investor who is averse to high risk, then stick to less volatile investments until you develop the confidence or perhaps the desire to take on more risk. In constructing their portfolios, investors and asset managers need to use essential economic and market models, historical correlation, and comparative performances. The aim is obviously to realize the best risk-adjusted returns possible with special emphasis on potential issues such as interest rates and the trends in global economy and stock markets.
Consequently, the proposed weighting percentages and asset allocations may constantly be altered to cope with the changing environment. It is not easy to provide intra-day return on investment figures because they will change by the time this article is published and the time you finish reading it!
The main criteria guiding investors behind all this is to basically get same return with less risk, or get a higher rate of return with some amount of risk. How could you, all things being equal, achieve the most predictable and reasonable returns possible? Again, it is always worth reminding yourself: High returns; high volatility; high risk. Historical returns indicate how an investment has performed in the past. Although there is little relationship among the performances of stocks, bonds, or other assets from one year to the next, a good case can be made for some general trends over extended periods of time. The historical returns aspect of constructing a portfolio is, in my opinion, a week link. This means that in hindsight one will discover that a few of the selected investments did as expected, some did better than expected, and some did worse than expected.
Guess what? Even though you may not feel completely confident at this particular time, the question becomes: When will you be ready to go? Before you actually make any moves to buy or sell, know your risk level, i.e. conservative, moderate, or aggressive. Subsequently, take a closer look at your current holdings.
Your portfolio needs to take into account any biases you might have. Each investor has had different life experiences, perspectives and beliefs. However, regardless of all those differences, the time to invest is now. If you do not like stocks, invest in bonds, real estate, various funds, etc. A diversified portfolio will protect you against your own biases and any biases from the sources you rely on for information.
What does this mean? Simple: You must begin to think differently about investing. The fact is, no investment is safe from all the financial perils that exist. Every investment is subject to one or more kinds of risk; there is no way around this “law”. On the other hand, investments that offer a fixed rate of return would be fine if we lived in a country that had fixed costs, but no such country exists on earth!
Believe me, I and lots of other people can give you plenty of reasons not to invest during any given year. Such reasons usually turn to be erroneous, but if you want some justifications to why sitting on the sidelines is “smart”, there will always be lots of reasons. I often read stories about managers and analysts who talk about markets moving up. Few days later, same people are talking about markets going down. Now, does this mean that you should get out of the market one day and get back in the next?
Of course not!
(Habib F. Faris is vice president at Clariden Bank, London)
