Ensuring portfolio resilience: key elements to consider


Finding the right investment is always a matter of personal choice. Despite discovering the assets you think could help you “get rich,” the choices you make can be a balance of art and math. Investors consider the potential returns they can earn from their investments and weigh the trade-off between risk and reward. They also consider the current economic climate and market conditions and how these might affect their investment portfolios.

Other factors that people consider when investing are the stability of the companies they invest in, the management team, and industry trends that can affect the company’s growth prospects. One aspect that cannot be neglected is the importance of a robust portfolio to ensure that the decisions you make are right.

The robustness of the portfolio is crucial to ensure investment security. But how can we ensure that our portfolio remains robust? One of the most important factors is diversification, which can only be achieved through vigilance.

To ensure true and effective diversification, each investment must be assessed for robustness. It is important to only invest in high quality assets with a good risk/reward profile. It is not advisable to simply buy lower quality investments to give the illusion of diversification. In fact, it can reduce diversification and weaken robustness, leading to the opposite results.

A higher number of assets is desirable, but the quality of those assets is paramount. By being vigilant and only investing in sound assets, we can ensure the long-term resilience of our investment portfolio.

The impact of asset class on portfolio resilience

The robustness of a portfolio varies by asset class. For example, the resilience of stocks is typically related to high-quality companies rather than their performance. This is due to the potential volatility of share prices, which can be affected by numerous factors and trading activity.

Understanding an asset’s context is critical to assessing its robustness. For example, fixed income securities are generally considered to be a lower-risk investment with a lower yield, making them more robust. It is crucial to have a thorough understanding of assets before considering them for investment.

Capital preservation for robustness

Capital preservation features are a key consideration for portfolio robustness. These functions can be implemented to increase robustness, but how?

Capital preservation features ensure that only a certain percentage of the investment is at risk. For example, if you invest $10,000 and put $7,000 in a fund that grows at an annual rate of 9% for five years, it ensures that the original amount is preserved at the end of the period.

The remaining $3,000 could be invested in a derivative product, e.g. B. An option to buy a stock that offers upside potential for an asset. This is a calculated risk as exercise of the option is dependent on the asset reaching the right level. However, the capital preservation ensures that even if the option fails, the original investment value is at least preserved.

Because such features typically involve a safer asset for capital preservation and a derivative, the investment is more robust and has lower risk overall.

measure volatility

An asset’s resilience can change at any time, underscoring the need for ongoing monitoring of the investment landscape. It is crucial to regularly assess whether an asset is still considered robust or not. For example, cryptocurrencies are a relatively new asset class with limited historical data. As such, it is difficult to fully understand their fundamental dynamics and potential to bring resilience to a portfolio. Conversely, some assets may appear resilient in a given environment but may not maintain their stability.

The S&P 500 has been around for 75 years and through extensive analysis we have a better understanding of the dynamics of the market as a whole. However, unforeseen global economic crises, pandemics or wars can still have a significant impact on any investment portfolio.

Knowledge is power

As an asset manager, we have a responsibility to anticipate and predict the behavior of all types of assets. Finding the right balance between factors we know to be true, those that usually are, and the unpredictable “wild cards” is crucial.

While we should all make the decision to invest in something that we believe in and that suits us, it’s important not to be blinded by false hope without fully understanding the industry we’re looking to invest in.

We need to continuously analyze and monitor the market and use our knowledge to ensure we can understand which assets to seek out in order to balance return on investment with considered risk and mitigation mechanisms. This approach allows us to build a fully diverse, sustainable and resilient portfolio.

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