The basics of investing

12/13/2021

Many investors have the desire to buy when prices are low, and to sell when they are high. For this reason, investments are often made on an emotional impulse, which unfortunately often turns out to be moderately successful. In corrective market phases, inexperienced investors sell their investments - for fear of losing even more - and do not profit from the subsequent recovery. Unfortunately, those who have been scolded only dare to re-enter the market relatively late, thus limiting their returns once again.

Investors who make their investments according to clear rules achieve proven higher returns. This blog post highlights the rule-based investment concept and gives you tips on how you can demonstrably optimize your returns.

Source: www.vontobel.com / The rollercoaster ride of emotions - the irrational behaviour of investors

Systematic Rebalancing:

Institutional investors generally rely on automatic investment mechanisms that adjust their investments to the initial strategy according to clear rules. This process is called rule-based rebalancing. The advantage of this investment strategy is that investors invest countercyclically, which often leads to opportune return opportunities. In practice, this means that asset classes with good performance are sold and asset classes with poor performance are added to. The bottom line is to sell at high prices and buy at low prices.

Pay attention to the ongoing fees:

However, rule-based rebalancing can only be successfully implemented if ongoing fees are kept low. A high fee structure due to regular transactions will in most cases swallow the generated return. With some providers the rebalancing is free of charge. In this consideration, the additional custody fees must be taken into account, which range on average between 0.2 - 0.3% p.a..

Strategic and Tactical Asset Allocation

Strategic asset allocation is of greater importance for long-term investment success. A study by Brinson, Hood & Beebower, which examined 91 large U.S. pension funds from 1973 to 1991, concluded that strategic asset allocation contributes more than 90% to the long-term success of the investment approach. But what is strategic asset allocation?

Asset allocation is divided into strategic and tactical asset allocation.

The Strategic Component

The Strategic Component defines the rough structure of the investment, well-known examples are strategy names like: "defensive, balanced and growth". The Strategic Asset Allocation is a long-term orientation, which is aligned on the basis of the risk/return profile depending on the customer profile. An integral part of this allocation is the determination of the reference currency. Taking into account these criteria and disciplined adherence to the investment horizon, the investment result is 90% "determinable".

The Tactical Component

The Tactical Asset Allocation is the core element of qualified advice. This is where the success or failure of your portfolio is significantly determined. Therefore, a clear clarification of the risk capacity and willingness of the respective client profile is crucial. This initially determines the range of asset classes. A short-term deviation (under- and overweighting) from the basic allocation strategy is possible in this part of the tactics, if any market opportunities arise and should be exploited.

Portfolio Management: Active and Passive Strategy

In portfolio management, a choice can be made between an active and a passive investment style. In an active strategy, markets are assumed to be not perfectly efficient, and the fund manager tries to generate excess returns over the given benchmark through tactical investments. The passive strategy makes the opposite assumption, namely that markets are efficient. The strategy attempts to replicate the given benchmark as closely as possible and diversifiable risk is avoided. A key point of the passive investment strategy is the low-cost structure.

The Core-Satellite Approach

This strategy tries to combine the advantages of both portfolio management approaches. As "core", index-tracking and low-cost investment products are used. With the "satellite" investments, the attempt is made to actively exploit market opportunities. For this purpose, actively managed investment solutions are used.

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