What Type of Investor Are You? Matching a Portfolio to a Risk Profile

which type of portfolio might a young investor who is not afraid of risk choose?
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this investment video is going to look at matching a portfolio to your risk profile hopefully gets you thinking about what type of investor you are so were going to be talking about what goes into a portfolio in terms of a high-level framework and how that should match your objectives and your risk requirements and then were going to run through several different types of risk profile to show how I can affect a portfolios composition so do keep watching to the end of the video so you get to see all those different types hello Im Peter Martin with trading to12 we add investment videos like this to YouTube regularly if you havent already make sure you subscribe to our YouTube channel so you dont miss out when we add new videos well as investors its all too easy to get bogged down in the minutia of stock picking of trying to work out whether a stock is cheaper its worth buying trying to time your entry to time your purchase or looking at stocks that we already hold to try and work out if its a good time to sell trying to time your exit and therefore its easy to lose sight or to completely ignore thinking about your portfolio at a slightly higher level in terms of the overall composition this is as opposed to professional fund managers who will tend to operate within the boundaries of a high-level framework thats intended to deliver returns that match planned objectives now of course your own risk outlook affects what investments best suits you historically we can look back and see that certain types of investment have a certain amount of risk attached and we can see what the average returns have been for these investments historically this information can be used to inform your investment decisions about what goes into your portfolio and how much should go into your portfolio now of course this is entirely down to the individual its going to vary quite a lot from person to person one person who wants to get regular income will need certain types of investment that will be different to someone else who isnt interest in a regular income and it just wants to maximize capital growth or if one individual is only looking to invest over a medium timeframe as opposed to another who
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wants to invest over a much longer time frame so it will vary very much from individual to individual but try and illustrate this were going to look at several broad general types of risk profile to show how that affects what might go in a portfolio as were going through these take a look to see which one you think youre closest to Im going to start with a couple that are on the more conservative end of the spectrum in terms of their attitude to risk the first of the risk profiles that were going to look at Ive called highly cautious and this has the lowest risk appetite of the ones were going to look at and the aims of the portfolio for this type of investor are to provide regular income and to preserve capital as much as possible whilst doing that their tolerance for fluctuation in the value of the assets is very small so the lions share of their investment is going to go into fixed income this amount would vary according to where we are according to market conditions good is where we are in the business cycle current conditions this could be somewhere in the region just give you a broad-brush figure of 75 to 80 percent say and at the same time they would have something in cash that would dont be in the order of one to two percent perhaps and then the secondary investment would be in equities its not as much as theyve got in fixed income its there to provide some potential for capital growth and perhaps some protection against inflation so this could be in the order of something like 25 percent lets say once again just to give you a broad idea and as I say these numbers can vary according to where we are in the business cycle you would review this portfolio according to market conditions if were in a downturn and equities might be small or a fixed income and cash might be larger if were in the early part of a growth cycle than equities might be a little bit bigger and accordingly a smaller adjustment made to fixed income and cash and then the timeframes that this would be before we would lean towards medium though you could also adopt this in the longer term some of the
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more aggressive ones that were going to look at whether it be only suitable in the longer term because of the potential for fluctuation in the value of the investments so our second risk profile is one that I have called conservative it just leans a little bit or further away from safety then the last one still scores similar aims the income is a bit more modest this income that theyre looking to get out of this and they want to preserve capital still but that need is just a little bit more reasonable its not to the max as we said with the last one and so their tolerance fluctuation in the value of their investments is a little bit more modest they still arent very comfortable with it but its just the lip it a little bit more of a tolerance than the last one and so once again that lions share if their capital is going to go into fixed income but it wont be as much as before just to give you a broad benchmark level it might be in current condition something like sixty percent and once again theyd have in cash one to two percent of their capital and this would leave just to say very roughly forty percent in equity so a bit more going into equities the portfolio as a whole still leans towards safety but also just a little bit more of a leaning towards potential for growth as we said before these would be reviewed regularly and adjusted according to market conditions and as with the highly cautious one this would be suitable for the medium term bit more of a bit of a leaning towards medium term but once again it would also be suitable for the long term so that was our look at our first two general types of risk profile on the more conservative end of the spectrum before we get to the higher end of the spectrum lets now look at someone who sort of middle of the road with a sort of more moderate approach to risk so the third risk profile is one that I call moderate and its a kind of halfway ground between security and growth so the aims have changed slightly its more of a focus on capital growth now we still want to preserve our capital
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whilst doing so so theres still a big focus on capital preservation just not as much as before and income becomes a secondary focus and the tolerance for a fluctuation in the value of the investments unsurprisingly is moderate theyre willing to put up with a little bit more of it than the ones weve looked at so far and now the primary investment becomes equities once again to give you a a very broad benchmark for what this could be it would be a bit more than half but not too much so we could be seeing something like 60% 55% in kind of current conditions and then leaving the secondary investment fixed income in the order of something like 40% 35 to 40 percent some would still be in cash 1 to 2% thats pretty similar across all these risk profiles doesnt have a very small amount held in cash and once again these valleys would be amended according to market conditions whether we were in a growth period or in a downturn and then the time frame of this because it is that kind of halfway ground it leans both towards medium and long term so that was a look and a kind of middle tier approach to risk and now lets look at our final two that are on the higher end of the spectrum in terms of willing to take on risk in order to try and gain greater returns so our fourth risk profile is one that I call bold and we can see that the aim has switched now to long term growth thats prioritized over things like income and preservation of capital and the tolerance for fluctuation in the value of their assets is now substantial the willing to put up with a lot more volatility and the primary investment is now switched to being equities ballpark figure current conditions we might say something like roughly 70% but also the makeup of those equities has changed and they might be pretty set as much as 5% into emerging markets roughly speaking as opposed to with our two most cautious risk profiles where there might be zero percent going into emerging markets and then the secondary investment in fixed income plus cash small man in cash one or two percent just as with the others you might be looking at roughly
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as we said before these numbers would be regularly reviewed to make them suitable to current market conditions and then the time frame now is only suitable to long term in pursuit of that long term growth our fifth and final hypothetical risk profile is what I call aggressive just as with the bold risk profile the priority here is long term growth but this time as much as possible the tolerance fluctuation is large and as you might expect the primary investment is equities in a period of expansion this might be early all the capital going into equities under prevailing conditions lets say it could be a ballpark figure of 98 to 99 percent and anytime Ive been talking about current conditions prevailing conditions talking about the time Im recording which is mid 2019 at a time when the latest GDP indications show a period of expansion but were sufficiently deep into a bull cycle to raise questions over how late stage we might be and under those conditions cash might be something like 1 to 2 percent roughly speaking perfect income in brackets here because in a period of expansion that might be 0 percent but in a downturn it might increase to something like 10 percent and in a downturn equities might be lets say roughly 80 percent in terms of emerging markets this would have the largest percentage out of any of the risk profiles weve looked at lets say roughly a hypothetical 10% might go into emerging markets there and then the time frame its only suitable for the long term in order to chase those long term growth returns and we were talking about so those were just five broad-brush hypothetical risk profiles to illustrate how it might affect the composition of their portfolios of course as we said before for your own personal portfolio it would need to be tailored to your own individual needs and objectives which you would understand the best I hope you enjoyed the video if you did hit the thumbs up button and give us a like or why not let us know what you think on the subject by sending us a message in the comment section we do read each one but thats all for now for me Peter Martin and trading – 1 – thanks for watching Ill see you next time goodbye
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