Creating Value through Growth Investments
Different financial circumstances commonly dictate the investment objectives of individual investors.
Investors saving for their retirement are usually attracted to growth-oriented portfolios which tend to target capital appreciation over the long term. Such portfolios are predominantly invested in assets such as shares and commodities which tend to generate long-term gains compared to safer assets like bonds and bank deposits. On the flip-side, such investments tend to be riskier in nature due to the fact that their price fluctuations are inherently less predictable.
Investing for growth, however, does not necessarily mean investing blindly in risky assets with the hope to achieve a pre-established gain.
There are established guidelines which an enterprising investor can and should follow in order to achieve a sustainable and effective growth-oriented investment plan.
Real vs. ‘Tick the box’ Diversification
Diversifying your investments is probably the most basic, but also the most forsaken rule in the investment world. In simple words, it means not putting all your eggs in the same basket. Distributing capital across different asset classes and in different investment ventures will strongly mitigate the risk of losing all the capital invested.
However several investors fall into the trap of diversifying by name. This is a common instance where investments are distributed amongst different assets, but which are expected to behave similarly given certain market conditions. Investing in all the shares listed on the Italian stock exchange for example, would definitely tick the box of distributing your capital. However, this does not translate into adequate risk diversification. If a recession or economic instability hits the Italian economy, the entire capital would be expected to suffer.
Low Correlation is Key
Real diversification is achieved when investing in truly different assets which are expected to behave differently given a particular economic scenario. The growth-oriented investor should seek to build a portfolio made up of assets which exhibits a weak relationship with one other. This would mitigate, albeit not eliminate, the probability that given an adverse event, all the investments in the portfolio would move together and to the same extent, in negative territory.
A correlation-conscious investor, for instance, would therefore avoid investing exclusively in all the Italian equities, but instead invest in a wider blend of companies dispersed around the globe.
Be patient, stay focused on your long-term objective
Given the higher return potential, growth-oriented investments are inherently more volatile. Thus, growth-oriented investments are often linked to retirement planning and a longer term investment horizon. Over a long economic cycle, the value of the investment will experience both peaks and troughs, during which investors should avoid over-confidence in the former and panic selling during the downturn.
Manage Risk First
Contrary to popular belief, a growth-oriented investor profile is not characterised by a tolerance to an unlimited level of volatility in the value of the investment. A growth-oriented investor should be conscious of the risk being taken with his invested capital. This is particularly important when the decision to invest for growth is underpinned by a rational investment objective, such as the need to generate decent capital out of which to finance living costs following retirement.
Fluctuations in the value of the capital invested should be adequately monitored and growth-oriented investors would do well to seek protection during periods where volatility in financial markets is much higher than that tolerated by the investor. For instance, during a global financial crisis, historic correlations would probably not apply. In this scenario, when all financial assets would be losing value abruptly, growth- oriented investors might do well to seek protection in safe havens, such as cash and gold.
Lower investing costs will enhance investment returns
Every investment made comes at a cost. Brokers, financial advisors, fund managers, stock exchanges, all need to be remunerated for the investment you make. The fees incurred vary depending on the type and nature of the investment vehicle chosen. The enterprising investor would be well aware of the fact that the lower the fees incurred, the higher will be the performance of his investment.
Steve Ellul is a Chartered Financial Analyst, a visiting lecturer at the University of Malta, Chairman of the BOV Employees' Foundation and Head at BOV Asset Management. The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice. This article was originally published in the Malta Independent on the 19th February 2017.