Financial professionals who manage investments on behalf of clients, profile their clients according to the way they perceive the client’s willingness to take risks with funds invested. Each investor would have a different risk profile and the strategy used to manage each one would differ accordingly.
A few broad risk profiles are given below:
Conservative risk profile: Aims for capital protection - Takes very low risk
Your primary investment objective is to preserve your capital which is essentially the principal amount you invested. Your objective is to earn a predictable flow of income from your assets.
This means you find it more reassuring to invest in products with fixed maturities and predetermined returns. Capital growth or growing your wealth is of secondary importance. You are willing to take only limited risk with your assets usually over a short term investment horizon.
Defensive or moderate risk profile: Aims for gradual capital growth - Takes low risk
Your principal investment aim is to gain a relatively stable and regular income. You are willing to take a moderate level of risk with assets you invest in. You aim to gradually increase the value of your portfolio over a period of time.
Balanced risk profile: Seeks a balance between risk and return
Your main aim is to achieve capital growth over the long term. You seek relatively stable returns, but do not mind taking moderate risks. Nevertheless, you expect your asset to generate a nominal income.
Dynamic risk profile: Seeks long-term growth potential
You seek to grow the value of your portfolio over a long term period. With the willingness to take a higher risk you intend to attract higher returns.
You are also aware of the short term fluctuations in share prices and consider its temporary fall as a buying opportunity. In this case earning a stable income through the investment is of limited importance.
Growth or aggressive risk profile: On a determined quest for growth
Your priority is to generate capital gains. You realise that over time, equity markets usually outperform other investments.
You are not afraid of speculating or going into what can be considered as risky economic sectors. You see a temporary market fall/setback as a buying opportunity. You are not concerned about how much fixed income your shares earn.
Factors that affect a decision to sell shares
For many investors deciding to sell their shares can be far more difficult than deciding to buy. There are many personal and market driven factors that can lead to a sell decision, including the risk profiles discussed above. Some factors to be considered are as given below:
The shares are no longer a good fit for your investment goals and risk tolerance
This might happen because your goals have changed over time. Alternatively you may have achieved the goal that you had initially. This would mean that you would systematically start selling the shares that were intended to grow to the financial goal you had planned. Sometimes an investor may find that the company he/ she invested in does not appeal to him/her as a good investment any longer. It may have changed its business plans and may not look as stable and attractive or there is a high level of volatility in its price movement.
This may mean that your investment is no longer within your risk tolerance levels.
Reinvestment opportunities
This is when you have identified a company that offers better returns than of the shares you currently hold. You can sell less advantageous shares in order to reinvest the funds in a better performing stock. It is important to consider how your new purchase will fit into the rest of your portfolio and your strategies of investment.
Price movements
If a share price suddenly falls beyond a certain acceptable percentage, some investors consider this a ‘sell’ point, in order to eliminate the possibility of further losses. Keep in mind that you may need to have observed the price movements of a share and have some idea of the share’s volatility to identify an untoward fall in the price. Also note that share prices can recover after falling or vice versa, as you will observe once you have spent some time observing and trading on the market.
Overvalued shares
You may want to sell shares when they are pushed way past their true value. A share is considered overvalued if its current price is not justified by its earnings outlook and is therefore, expected to drop. Overvaluation may result from an emotional buying spurt, which inflates the stock’s market price, or from deterioration in a company’s financial strength. The strategy is to sell when they are over-valued and buy them back after a market correction has dampened the price.
Rebalancing the portfolio
Rebalancing a portfolio entails bringing the percentage of each asset in an investment portfolio (asset allocation) back in-line if it has deviated away from one’s target asset allocation.
Say at the start you decided that the best allocation for your circumstances is 60% shares, 30% bonds and 10% cash in your portfolio. If you now have 80% of your portfolio in shares, you may consider that shares represent an overly large exposure in your portfolio. In this case you can consider your overall portfolio allocation and diversification within the shares you possess. You can now consider selling-off some of your stocks bringing the asset allocation percentages back into alignment. - Courtesy the Colombo Stock Exchange
(To be continued)