Identifying investment options and alternatives

It is imperative for an investor, from the inexperienced to the seasoned one to analyse what assets are available for generating future wealth and income.

Along the years, and given the returns generated, investing has become a popular alternative to fixed term deposits even more now that interest rates continue to remain at quite low levels (although we have seen them creep upwards over the past 6 months or so). A number of options are available to individuals of all ages and properly understanding where one stands on the spectrum is pivotal to making the right investment decision.

Equities are considered to be one of the most volatile asset classes. They have the potential to generate substantial returns over the long term, supported by the fact that bull markets have almost always outlasted bear markets in previous economic cycles, according to Morningstar analysts. Whilst the past is no guarantee of future performance, patterns and economic cycles do tend to repeat themselves.

Investors in their early years may benefit by keeping larger exposures to equity investments, assuming they have the potential for a longer investment horizon, and no major imminent financing requirements. The risk-reward trade-off of investing in equities from a young age is advisable, assuming a full suitability profile is conducted by one’s investment advisor, where the ability and willingness to take on risk according to one’s financial situation are assessed and reviewed in an on-going manner.

Using the same suitability profile analysis, middle aged individuals’ optimal investment decisions will vary according to a number of factors, such as status, demographics, etc., and usually range from diversified mixed portfolios consisting of equity and debt instruments, down to conservative fixed income or risky equity allocations. An investor’s ability and willingness to take on risk are critical and determining factors behind a recommended asset allocation.

Take for an example, an investor whose primary goal is to support his family, has a mortgage to pay back and other chunky expenses. In such case, investing fully in equities is a risky option, unless their financial situation permits them to. A diversified portfolio is usually the preferred option, where the mix of High Yield and Investment Grade fixed income securities and a proportionate equity and cost allocation have the potential to smooth returns to an investor over the investment horizon.

It is not recommended for investors finding themselves close to or past the pension age to be highly exposed to risk, and they should be aware that they have limited tolerance (and scope for that matter) for taking on risk if they depended heavily on their wage income. Fixed income securities and/or diversified fixed income portfolios with minimal to no equity exposure are usually the optimal options for investors within this age category. Exceptions apply to the wealthy, though the majority of pensioners find themselves reliant on monthly income once they’ve reached the retirement age.

It is safe to say that in Malta, government bonds and local fixed income securities remain very popular amongst the middle aged to pension aged investors whilst the younger generation has become accustomed to taking on more risk and higher risk allocations in the form of high yielding funds, high yielding debt and/or equities.

At the end of the day, investors have the choice where to invest, given their preferences and suitability, though the rational investor will almost always consider the opportunity cost beforehand that is the benefit of an alternative foregone for a preferred choice today. Having said that, performance depends on what underlying assets have been included in a diversified portfolio. In addition, notwithstanding the degree of risk of an asset class, one must stress the importance that an element of market outlook must be taken into account when constructing investment portfolio and recommended asset allocations.