Portfolios that count on different types of assets to reduce risk
Imagine that you are interested in starting your own business in a small seaside town where you’ve recently moved to and that usually is visited by many tourists.
Your initial idea is to open an ice-cream parlour so that you can fulfil the visitor’s wish to have an ice cream especially in the summer time. However, you think over your idea and realize that with the same space if you also offer coffee and tea you can broaden your target audience and you can also expand the business’ season to both summer and winter time. By following this strategy you will have diversified your business and significantly reduced its risk.
Modern Portfolio Theory (Harry Markowitz 1950), assumes that investors want guaranteed returns and have risk aversion.
This theory proved that a portfolio’s risk can be reduced, as the ice cream business did, by adding other products to parlour’s offer or in other words by combing different stocks or assets in a portfolio. This is so due to the fact that there are assets that correlate negatively (such as colder temperatures mean less ice cream sales). Although the correlation isn’t perfectly positive it still helps to reduce the risk.
We use this concept in our diversified portfolios in order to build efficient portfolios. We combine different types of ETFs, which cover different asset classes, equity and bonds, and from different geographical regions so that we optimize performance and reduce risks; always depending on the investor’s profile.
However, our objective isn’t only to apply the Modern Portfolio concept. Our management is completely dynamic. We periodically rebalance our portfolios and we also allocate up to a 15% of the portfolio to opportunistic investments to make sure that we can take advantage of specific market situations. Furthermore, we “take care” of portfolios in exceptional times according to Modern Portfolio assumptions such as CPPI. These modern strategies help protect a portfolio from falls that are extreme and difficult to recover from in times like the recent financial crisis.
This dynamic management is embedded in all our portfolios. Know your investor profile and start investing as soon as possible. We can help you take better control of your finances.
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