Short, medium and long term. The sections to divide the portfolio mark where it is invested and the risk that can be achieved. The theory suggests that in each one a type of asset prevails, but the investor’s stamina comes into play.
“Broadly speaking, one asset class or another will be more advisable depending on the term. In the long run, the most advisable thing is variable income (stock market), which is the most profitable asset. But that is with an objective risk profile… The The first thing you have to take into account is your personal risk profile: if you don’t investigate how you’re dealing with seeing market declines of 10%-20%, even if you have a long term, you’re going to get scared and you’re going to sell,” comments Carlos Bach. , partner and director of Abante in Barcelona.
Before diving into the market, it’s time to do some homework. Be clear about where you stand, what is expected in the future and what each person is like. “Know yourself,” she sums up. Do a little psychology and draw up a life plan, which defines whether or not you need money, what risk-taking capacity you have or whether you are able to withstand losses. You can aim to guarantee retirement, to maximize money that you are going to leave to your children, to buy a house… This indicates which part of the portfolio has to be safer and which part can risk more, with clearer deadlines.
It is clearing up unknowns, because it may be that “they can objectively take risks because they have money that they do not need for 10 years, but not with their personal risk profile,” he says. “It’s what really defines how much risk we can take.” Risk is technically associated with volatility, but Bach says that it is really the possibility of permanent losses. “The permanent aspect must be emphasized.” If someone invests the money they need in a year in a stock market fund, they may face notable losses, as occurred in 2022. If their term is longer, in the following years it is very likely that they will recover it and they will no longer be permanent. .
Logically, the minimum goal is for investments to mature or be very close to inflation, so as not to lose purchasing power. Again, how to achieve this depends on the profile. When assembling the portfolio, “each client is different, each investor is different. You have to understand that you can lose money and being able to sleep well is very important, you have to understand that you can lose money,” comments Jaume Santaeularia, partner at Norz Patrimonia . “Each asset has its positive and negative part. The important thing is that the investor understands each of them,” he continues.
After laying the foundations and now focused on the deadlines, what are they and what should be invested in for each one?
In the short term, investments aimed at one or two years are included. It should coincide with money that is intended to be recovered without great variation in this period for some reason (payment of taxes, purchase of a car…) and that can be easily accessed. That is, with limited or no risk. “In these cases, zero is allocated to variable income, no matter how good it looks, because we don’t know what can happen,” warns Bach. The outbreak of the covid and the stock market crash of 2020 serves as an example.
Thus, the attention goes to fixed income. Bills, bonds, corporate debt… In these cases, for example, an emergency savings would fit that serves to cover one or a couple of years of expenses or that is saved in case one loses a job. With fixed income we will be safer, it is less volatile. “Prices may go down, but the risk level is very low.” It works except in exceptional cases such as 2022, when rate forecasts skyrocketed and profitability was negative.
“The more conservative you are, the more short-term you can be,” says Norz Patrimonia. Their recommendation is to opt for high-rated debt in any case.
If you are not convinced, deposits or monetary funds are another way out. Safer, but somewhat less profitable.
In longer terms, the portfolio begins to mutate. If one plans in periods of 3-5 years or slightly longer, the investments will be placed “depending on the degree of certainty that we want to have and the risk that we are willing to assume,” explains Bach. If you are looking for greater security, you can opt for more fixed income, but with several years of margin, the stock market appears to be a great option. Also because in fixed income in medium or long terms, the evolution of interest rates can impact, which has an impact on its price. “Although it is called fixed income, it is only fixed income if you hold it until its maturity. If not, it is variable because it ends up varying in the market,” Santaeularia compares.
“If you have a longer term, as a general rule, put more variable income,” Bach reiterates. “It is true that equities can fall one year, but they usually recover in one or two years even if they are strong falls. And as terms are extended, it becomes more important that you do not lose money,” he argues.
Santaeularia agrees. “Variable income involves taking risks. If you want to hedge against volatility, you have to think in the long term. In the short term, if there is an unforeseen event, you can lose a lot,” she explains. “This means thinking five years up.”
When talking about the long term, the ideal minimum is ten years. It would be money that you know is not going to be needed, that should not be used even if circumstances such as a loss of employment occur. There is no discussion here: variable income, variable income and variable income.
Having seen the chapters, Abante is clear about it. “The part that is needed with zero risk, fixed income. The part that is worked for five years, such as to leave money for the children, has to be distributed mixed, for example 50% fixed income and 50% variable income. And If it is not needed – and one opts for very long terms – everything is in variable income.
To channel the investment, it is recommended to draw on funds. “It is the only way to diversify money for a traditional saver. If you have 6,000 euros it is better to invest in several funds that in turn invest in hundreds of companies,” says Santaeularia. The same with fixed income funds that group promissory notes, bonds or similar products.
There are commissions involved, but they are based on what one can get rid of: having to be aware of the evolution of the markets, readjust one’s portfolio or have sufficient knowledge beyond one’s country. A Spanish investor will be more involved in local companies than in American companies or those from other parts of the planet. “You know the market closest to yours. This lack of knowledge means losing opportunities,” he adds. Regarding tax, he also points out that a fund only has an impact with the sale. Bach also defends that “investments in general have to be liquid”, which is achieved by going with funds. In both variable and fixed income there is an ocean of offers.
One of the plans that mix being conservative with greater profitability is to try to replicate what the global economy does. For example, opting for a fund like the MSCI World, which brings together some 1,500 companies from all over the planet, a good way to replicate the progress of the global economy. “With diversification on the planet the possibility of losing everything is zero and historically in the worst crises it ends up recovering,” he adds. In terms of 10 years, the historical profitability is around 8% annualized, he details.
In the case of fixed income, a fund ensures liquidity at any time. “Imagine that you invest in a 10-year German bond. If you need to sell both, its price may have dropped, and it may not be able to be sold easily,” warns Bach. You can opt for the cumulative ones, which reinvest all the amounts, or the distributive ones, which distribute a part of the benefits of the coupons they receive.
Another decision is whether to opt for active management – whoever manages the fund readjusts it according to certain parameters – or passive – it is limited to replicating an index. “It is difficult to sustainably beat the benchmark index. It may pay to buy a passive vehicle that only replicates. Like a Standard ETF
Before deciding on one or the other, you have to bother to see if it has had a good performance and how it behaves with the rest of the market.
Adding capital to the investment is another of the repeated recommendations, since it allows you to enter different market situations. There is no single figure to save, because again personal and income factors come into play.
“At 25 it is difficult for you to allocate money to investments. Between the ages of 30 and 50 there is already the capacity to save. At those times I would recommend allocating at least 10% annually to investment. It means that each year you can invest in different moments of the market. At higher prices, lower ones… You make an average,” they point out in Norz.
