The amount of risk an investor takes on is crucial to the entire investment process. Regardless, several investors often misunderstand the situation and devote far too little time calculating the appropriate risk levels. The Smartvestments series is brought to you to make sure you have the necessary tools and informations in order to make the right investments.
This year’s equities started off well, but with the resurgence in the Covid-19 infections, fueled by Omicron and Delta variants, how should investors position their fixed-income portfolios?
As an investor, you might be planning on taking a more conservative approach to fixed income. Though this may appear to be a safe option, it can leave a lot of money on the table.
The current environment demands investors to consider whether they have enough risks (both credit and duration) — in their fixed income portfolios. Countless texts and pie charts out there categorize risks for practical investment purposes; however, investors are unable to understand their context. As a result, they just check off that “medium-risk” on forms, assuming that something between the two ultimates will always be right. However, this might not be the best belief because products are often misrepresented as medium or low-risk.
The appropriate risk category varies from person to person as it’s determined by investors’ attitude to risks and the level of assets they own.
That said, we intend to introduce you to potential portfolio risks so you can ensure you’re taking upon ‘enough risk’.
Risks In The Fixed-Income Investments
Fixed income risks occur as a result of the volatility of the market’s conditions. They impact the market value of assets when sold, cash flow from the asset while they’re being held and additional income made from reinvesting those cash flows. By understanding the potential risks involved, investors can stay better informed about the best fixed-income investment to invest in.
Why do risks matter?
Having an in-depth perception of the possible risks involved with the fixed-income portfolio can help investors understand the exposures they’re bringing in by investing. This allows investors to decide the percentage of risks they’re willing to take upon.
How To Access Those Risks In Your Portfolio
An all-equity portfolio might neither be relevant nor desirable for most individuals. As a result, people prefer a well-balanced portfolio that performs consistently over the one with a high risk that can either skyrocket or crash.
It’s likewise important to remember that the share of the portfolio invested in equities is the most key variable in predicting the risk profile.
According to the available sources, a low-risk portfolio encompasses 15–40% equities. The medium-risk has a risk level of 40–60%, while the high-risk range 70% and above. Lower-risk asset classes such as property funds, bonds, money market funds, and cash make up the rest of the portfolio in each case.
A portfolio can theoretically be so well managed that it consists primarily of equities and has a medium risk level. This, however, does not happen very often.
The risk level is pretty accurately reflected by the percentage of equities in the total portfolio.
Follow the Thumb Rule
As a thumb rule, if the value of your investment drops by 30%, it’s a high-risk investment. As a result, risk levels can be assessed by calculating the maximum amount you could lose with a given portfolio.
We know you’re probably thinking about it.
If it’s all about following this simple thumb rule, why do people end up with higher risk levels than they want? Well, the problem is that selling higher-risk assets often generates more revenue for the industry. It’s for this reason that they tempt advisors to recommend them. And investors are easily enticed by such high returns on the stock market that they overlook the risk of potential losses.
So, if an advisor suggests a higher-risk portfolio, be wary; they’re just trying their luck, and probably yours as well.
Regardless of the potential upside, when equity markets dip, most equity-based investments witness a dip as well. As a result, the most reliable way to avoid losses and unpleasant surprises is to stick to basic asset allocation rules and never invest more money in the stock market than appropriate for your risk level.
Have your risk outlines clear enough
If you’re just getting started, investing in multiple asset classes can help keep your portfolio income high, stay ahead of inflation and reduce the possible risks. But there’s a thing with playing all-safe with investments.
Going for a more conservative approach — avoiding emerging markets and focusing on short-term goals — might just be a really bad idea.
If there’s anything investors must get right, it’s deciding about how much to put in stocks against the safer investment. There are clear distinguishing lines between low, medium and high risks categories. All you need is to ensure the risk level on your portfolio fits your risk tolerance level, and you’ll be fine.
Bottom Line
Isn’t there always some risk associated with every investment?
However, ignoring these dangers and assuming that you’ll always make a profit is a recipe for disaster.
The biggest threat to an investor seeking principal protection through income is keeping up with inflation, as even a minor change in rates can decimate the value of your long-term holdings. Rather than relying on standard bonds, trying to diversify among high-quality, higher-yielding investments can be a smart way to mitigate these risks.
We hope this series will help you build a robust fixed-income portfolio, ensuring you’re setting yourself up for the best. Invest wisely. Smartvest with IXFI.
Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.
Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.
Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.
