Wesley Karssen - 30 December 2021

Portfolio and risk management

At Eightglobal we help our clients with all the insights they need to manage a diversified portfolio. The following blog post explains just that, diversity is important.

Investing used to have a very sturdy and rusty image; it’s only for the old and rich, Right?

Wrong! Investing is hot and it’s trending. It’s not a dull subject anymore. It’s a hot item for millennials and even teenagers to talk about. This has multiple reasons: Low-interest rates on borrowing money, negative interest on saving money, inflation, a very heavy bounce from the stock markets after the initial COVID-19 crash, years of continuous growth from stock markets around the world, etc. There are too many reasons to think of. 

Why should I read this?

If you’re reading this blog, it is very likely that you’re a 25-35-year-old male, invested mainly in crypto. Don’t worry, this blog will also be helpful if you’re a 50-year-old woman 😊.

Congratulations, you made a huge step: you’re investing. This gives you a great advantage and grants you massive opportunities later in life. Maybe you’re even lucky and already made quite the banger. 

However, with this massive inflow of people who are mainly new to investing, there are areas to be covered. People hear about the profits other people have made lately and they’ll jump right in without doing proper research. Part of that research should be portfolio/ risk management. That’s what we’re trying to educate you about. 

Globally, we’re seeing increased numbers of people starting with investments and seeking a way out to make their money work for them. With the massive shift we’re seeing lately we have the following statistics that prove that investing is becoming more mainstream, instead of being a toy for the old and rich. 

There are some interesting facts coming out of this:

  • The average age of an investor dropped from 53 to 49 in the span of 10 years. 
  • The average starting age of an investor dropped from 41 to 38 in the same time.
  • On average, 22% of the households in Europe are holding stocks or investments, compared to only 15% in 2005. (EC Europa, 2021)
  • In the Netherlands, being one of the most extreme shifts, the amount of investors has doubled in 6(!) years’ time.(CBS, 2021)

There are loads of more interesting statistics, but we won’t bore you with those. Let’s cut to the chase. 

Starting out

Investing can be very exciting or very scary, or maybe somewhere in between. It really shouldn’t scare you though. If you’re scared, and it’s giving you sleepless nights, it means you’re taking too much risk. 

How do you determine your risk capacity? By creating a risk profile, which is basically an evaluation of your individual willingness and abilities to take risks. The way your portfolio should look depends on different categories. We’ll go through the most important ones.  

Risk tolerance

Your risk tolerance is about the acceptable deviation in the performance of your portfolio in achieving the objectives. Tolerance is based on your total wealth, it’s the risk you are able to carry out from a financial standpoint. An aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance. Risk Tolerance can be approached rationally, most factors are measurable; (disposable) income, costs, capital

Risk perception

Risk perception is the amount of risk you’re willing to take on a psychological level. Are you having sleepless nights because of your investments? This is probably a sign that you have invested either in the wrong business, or you have too much exposure.

Risk capacity

This is the reason you’re risking your investment, and also the degree of certainty it will be met. For example, for an investor who may have a target of having his wealth grow at a rate faster than inflation, it will be required to include some growth asset exposure like equities that have traditionally beaten inflation, even though there may be some associated volatility. 

For example, the same investor may have the capacity to take the risk for his retirement that may be fifteen years away, but may not have the same risk capacity for a down payment of a home to be made in the next twelve months. 

It is therefore critical to better understand the end-use of the monies being invested so that the correct risk capacity can be gauged. Therefore, risk capacity is really about how much risk as an investor, you can “afford to take”. (source: Economictimes.com)

Horizon

Your investment horizon is the longevity your investing the selected money for. This should mean that you will not be in need of the invested money for the selected period of time. This is different per person and goal. Your horizon is dependent on a variety of subjects, your age and goal being the most important ones. A general line within the investment world is as follows; ‘the younger you are, the longer your horizon is. Statistically, you can take more risk’’.  Though this is true in a sense, there are subtle notes to be said since it also depends on your goal. 

An investor has to determine for him/ herself what their goal is. Your goal may be your pension, a mortgage payment, general wealth increase or any other situation that requires a big chunk of money. The goal can be categorized into the following:

  • Very short term,  <1Y
  • Short term, 1-3Y
  • Medium term, 3-7Y
  • Long term, 8-12Y
  • Very long term, 12Y+

When blending it all together you have your very own risk profile. Online there’s a variety of different free tools available. Usually, it’s a survey. There are different scenarios. In the European Union, there’s a baseline of seven risk profiles as of an agreement after Basel III in 2008. Where profile one (1) is ultra-defensive, you should probably be invested in bonds. And profile seven (7) is ultra-aggressive, where the holder is likely to be able to have some volatile investments. This may vary per country or continent. 

It’s best to re-assess a risk profile every six months because personal situations change all the time. Perhaps you’re able to take all the risks in the world right now. However, you should adapt your portfolio to your new situation a few months later on the occasion you’re getting a child or perhaps you’ve changed jobs.

Conclusion

If you have to put it in words, and you’re inexperienced, it’s very unlikely that you’ll do a great job. However, your brain gives you all the signs you need. How have your emotions been during the corrections, like the recent Bitcoin drop earlier this month, the Bitcoin crash in May? What were your thoughts when the stock markets plunged in March 2020? 

Getting a grip on your investments should help you do so;

  1. Keep a diary. On a weekly basis, write down your emotions in max two sentences and grade it from 1-10. Where one represents crying, going broke, feeling lost. And where ten represents feeling on top of the world. Giving yourself a low grade too many continuous weeks? Red flag; have a look at your portfolio.  
  1. Diversify your investments. Do not put all your eggs in one basket. As a reader of this blog it’s very likely you are over-exposed in crypto, probably even in one small-cap coin. We all love the stories of people who made millions on a gem, however, you don’t hear the stories of all the people who lost their life savings. Depending on the risk you can take, as explained in ‘’starting out’’, diversify. If you are able to do so, diversify to commodities, stocks, bonds, crypto and cash. Perhaps one industry pulls your attention, and another one bores you to death. Suck it up, it’s your finances. 
  1. Keep a buffer. How much you should hold as a buffer is different per person. It depends on your lifestyle, your income, your costs and your total wealth. A good baseline is to have enough cash on hand to make it six months if you were to lose your job or investment. For example, my fixed costs are €1.000 a month, and I spend around €500 a month on things I like. This means I should have a buffer of €1.500 * 6 = €9.000. This gives you a comfortable backing if you were to lose on other fronts. 
  1. It’s a marathon, not a sprint. This would not need further explanation. 

About the writer

Hi all! My name is Wesley Karssen. I hope you have enjoyed the blog. It’s quite possible that my name is unfamiliar to you. As an operational manager, I usually handle other day-to-day tasks. However, my background is in finance and investment banking. Though I love the new wave of people joining the world of investments, it worries me how little people do to manage their finances as a total package. I hope that the blog helps you to be more aware of your total investment portfolio.