- Roberto d’Ambrosio, CEO, Axiory Global
Appropriately managing our own wealth is key to achieving and securing our life goals in a timely and sustainable manner, and it entails knowledge of the environment we will be operating in and understating of the rules which need to be followed to successfully maintain and increase the value of our holdings protecting them from excessive fluctuations.
The first aspect to consider is determining the composition of our investment portfolio, by determining which part should be kept liquid (typically cash on bank accounts), which should be allocated to low-risk instruments (e.g. utilizing high rated bonds, both sovereign and corporate and to certain extent in ETFs on world indexes) and which would be the more aggressive part, which would be invested in stocks, high yield bonds, specialized ETFs and other risky assets.
The allocation needs to be determined based on the personal risk appetite and the planned expenses, which will determine when the investment portfolio or part of it should be liquidated. The higher the risk appetite and/or the period until the cash is needed, the bigger the riskier portion of the portfolio.
While the buy-and-hold strategy is definitely a winning strategy in the long term, investors should rebalance their portfolio based on the performance its components. As an example, if we have gone through a long period of bull market in the stock markets, the related part of the portfolio would now be bigger the initially intended one. In order to maintain the same risk profile and reduce possible excessive volatility of the portfolio returns, the investor can rebalance the portfolio, by selling stocks and reinvesting into bonds or allocating cash, so to bring the portfolio back to the initial allocation. The opposite can and should be done when we face a bear market, as the aggressive part of the portfolio falls below the intended allocation.
An investor could be even more active, and actively trade in the markets and eventually using leveraged products (instruments that can be bought or sold utilizing only a part of the exchanged value).
While this is an engaging and potentially very rewarding investment activity, the risk the investor has to face and adequately manage is much higher than that linked to the above-mentioned approaches.
If we decide to engage in such activity, we should allocate to it only a small part of our investment portfolio, which we cannot envisage to need in the short term and that, even in the case of a complete loss of the invested capital, will not put too much stress on the investor wealth and that of his household. Much of the disappointment for novice short term/speculative investors is allocating too much capital on it as compared to their risk tolerance and their overall wealth. Trading in such a situation is very stressful and will lead, more often than not, to bad investment decisions and unexpected excessive losses.
One word of advice on leveraged products: while it is true that leverage can amplify several folds the return of an investment, is also true that losses are amplified the same way. Therefore, always be wary of messages from intermediaries boasting the power of leverage as a get-rich-quick mean to financial prosperity. Lastly: educate yourself on all aspects of the financial markets and only invest in what you have studied, researched and fully understood
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