The development of an investment concept is carried out in three steps. First, the investment objectives are identified. Then the risk profile of the investor is determined. Finally an asset structure that covers the investment objectives and the risk profile is established.
1) Identification of the investment objectives of an investor
There are four different kinds of investment objective:
- specific objectives (e.g. purchase of a house; new car in 2 years)
- general objectives (e.g. wealth formation, old age provision)
- precaution against emergencies
- non-material objectives (e.g. sustainability)
Generally, several investment objectives are pursued at the same time. While clear guidelines for the asset structure arise from the first three kinds of objective, the choice of investment with non-material objectives is mostly restricted.
2) Determination of risk consciousness and risk-taking capacity
With the help of a questionnaire the personal attitude of an investor with regard to taking risks is examined. In addition, the personal financial circumstances are reviewed in order to determine the personal ability to cope with the consequences of risk-taking.
After our review, the investor is assigned to one of the following groups:
- The risk adverse investor: the income return is secondary compared with risk considerations. He tolerates no default risk and is only seldom prepared to accept even a low price risk.
- The conservative investor: capital preservation that takes inflation into account is of high importance. He has subdued income return expectations. He accepts some price fluctuations, but only very low default risks.
- The moderate investor: he has middle income return expectations and consciously accepts the risks of short-term and medium-term price fluctuations. He is also prepared to tolerate default risks to a limited extent.
- The aggressive Investor: his income return expectations are high. To achieve them, he is prepared to accept significant default risks and above-average price fluctuations.
3) Consolidation of investment objectives and risk profile in an investment concept
An asset structure should contain three constituents that represent the specific solutions for the respective investment objectives:
- Investments for taking precaution against emergencies: quick availability is crucial; liquidity and insurances are preferred
- Investments for specific objectives: they must be carried out with exactly defined maturity terms and very low default risk
- The long-term investment should be structured depending on the personal risk profile of the investor:
- Risk adverse investors should restrict themselves to liquidity, government bonds and highly secured mortgage bonds.
- Conservative investors should invest predominantly in bonds with a low default risk, but should also add some low risk stocks from financially sound companies.
- The moderate investors should select bonds with a good credit rating and low risk stocks as their core investments; they can add some riskier investments such as growth stocks in smaller weightings.
- Aggressive investors will put their focus predominantly on momentum growth stocks & high-yield bonds, however to protect themselves they should add some defensive stocks & bonds with a good credit rating to their portfolio.