Investment Strategies

The asset manager must elicit the exact financial position and investment objectives of the investor. If this analysis concludes that a substantial portion of the wealth is to be invested, then the asset manager must design an investment strategy capable of meeting the investment objectives using the lowest possible risk.

The appropriate investment strategy is determined in view of the individual investment objectives while considering the investor’s ability and willingness to take risks.

Investment strategies

The consultant has to suggest a suitable investment strategy based on the evaluation of the investor`s investment objective.

The financial community has developed a number of designations for possible investment strategies:

The strategies may be described from the perspective of the investment objective (“security”, “return”, “growth” or “chance”) or from the perspective of the tools used ( “bonds strategy”, “shares strategy” , “derivates strategy”). Also fantasy names are being used.

Always crucial are the contents of an investment strategy and not its creative designating. Thus the investment strategy - irrespective of promises made in advertisements - is to be carefully reviewed in terms of its contents, in order to reach the investment objectives while using as little risk as possible.

The decisive factors to determine the suitable investment strategy are the investor`s ability and willingness to take risks.

Ability to take risks

Ability to take risk is the measure of financial independence from possible losses: The less the investor relies on the invested assets for covering his actual and future financial obligations, the greater his financial independence and therefore his (objective) ability to take risks.

To determine his ability to take risks, the investor has to answer the following question:

“Which risk of loss am I able to tolerate based on my actual and future financial obligations as well as bearing in mind expected living conditions (income, constant expenses, general life planning, expectancy of inheritance, pensions of first, second and third tiers?”)

A high ability to take risk is indicated, if only part of the assets are being invested or a young investor has constant income from his work which allows him to recuperate better in cases of loss. The other way round, a retired investor without income from work who finances his living mostly by returns from assets, indicates a low ability to take risks.

One must differentiate between the (objective) ability to take risks and the (subjective) willingness to take risks.

Willingness to take risks

Personal willingness to take risks determines to what extent an investor is prepared to accept price fluctuations and losses. It has to be differentiated from the investor`s objective ability to take risks.

To determine his ability to take risks, the investor has to answer the following question:

“Which losses am I prepared to bear“?

A wealthy investor who solely invests a fraction of his wealth and who in addition to that receives a constant income will have a high ability to take risks. If he is however not willing to bear small losses, his willingness to take risks has to be considered as low although his ability to take risks is high. The low willingness to take risks thus limits a high ability to take risks.

On the other hand, a family man with high financial obligations, mediocre income and little wealth has a low ability to take risks. This objective ability to take risks limits the reasonable investment risk, even if the investor would be willing to invest in many risky products. Here a high willingness to take risks is being limited by a low ability to take risks. The asset manager is committed to point out such discrepancies prior to the implementing of a rather risky investment strategy and therefore has to discourage the purchase of risky investments.

Typical investment strategies

From the perspective of a possible investment objective and taking the ability and willingness to take risks into consideration, the following typical investment strategies may be mentioned:

Investment strategy “Fixed Income”: Based on low ability and willingness to take risks only investments in first class, fixed interest investments bearing values with little price fluctuation are to be selected; investments in shares are excluded.

Such a strategy is recommended for investors who have to finance their living expenses from the return of their assets and thus mandatorily are dependent on preserving their capital.

Investment strategy “Income”: In addition to investing the bulk of the assets in fixed interest securities, a small minority of the portfolio can be invested in selected equities in order to increase income.

Such a slightly risky strategy is recommended for investors who have not only to live on the returns from assets but have an additional source of income (part time job, pension) which contributes to the daily living expenses.

Investment strategy “Balanced”: The portfolio comprises a share percentage of 40-50 %, depending on the market conditions.

Such an investment strategy holds a medium risk, which again depends on the quality of the shares. Such strategy only is to be recommended if the actual income is being secured otherwise.

Investment strategy “Growth”: The percentage of shares comprises 60-70%

Such an investment strategy holds a high risk: Investments in shares may result in total loss, therefore this strategy only is to be recommended, if the actual income is being secured in the long run and the investor readily may absorb a total loss of his assets.