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Tuesday, October 25, 2016

Private investment: how to beat inflation

Inflation and Deposit rates fall, while the attractiveness of investments in the stock market, by contrast, is growing. Private investors a chance to receive income above inflation. We just know about the basic “safety rules”.

photo: pixabay.com

The decline in the yields of Bank deposits is a natural phenomenon. Apart from the fact that the rates are always tied to inflation, which is now in Russia in a steady decline, falling interest rates on deposits are now working two more powerful factors. The first is the expenditure of government funds of the Reserve Fund, which leads to a significant flow of funds into the financial system of the country and reduces the need of banks in the money of private investors.

Secondly, the crisis of the Russian economy is not really left, and banks, in fact, no one to lend money, the volume of loans to enterprises is growing, and individuals — decreases, which also reduces the interest of banks to attract deposits.

But there is a silver lining. Reducing inflation usually contributes to the growth of the stock market. Especially if the economic downturn will change is still a period of growth that, according to our officials, is not far off. In addition to the increase in the stock market it can be expected that at the same time, raise your head and other more aggressive investment strategy using high-risk financial instruments, they, in practice, work well in conditions of pronounced trends, such as the growth of the stock market or the weakening or strengthening of the ruble.

In these circumstances, the private investor is inevitably a temptation to make more than the Bank Deposit, at least to beat inflation. Another thing is that in the pursuit of profit many people forget about the risks. To talk about “investment security”, “EV” asked the expert of financial market participants and consultants.

Follow the risk

Before you invest in a particular financial instrument, you should understand how risky it is. On an intuitive level, private investors usually understand that, for example, bonds are less risky than stocks, their prices jump with a much smaller amplitude. Also intuitively, the risk always pursues a level of profitability with some variations (for example, the risk strongly depends on how the strategy is clear to the investor). That is, if you propose a strategy with a yield of 100% per annum, the risk is very high. In contrast, Bank deposits offer yields below the rate of inflation, and the risk tends to zero.

However, this is one of those times when intuition should not replace information. No matter what was discussed — stocks, bonds, or complex strategies of management companies, investors should spend time and understand how to behave a particular tool. The main objective is to assess the potential income and the size of possible losses in case of unfavourable development of the market situation. The best way is to look at the dynamics of a particular financial instrument for at least the last few years.

“The correct assessment of risk for liquid assets can be obtained from their historical values, including the dynamics in crisis periods,” says portfolio Manager IR “Forum” Alexander Gorchakov. If these historical numbers are from 2007, the maximum drawdown, i.e. the largest decrease in prices relative to the previous maximum, expressed as a percentage, is perfectly adequate risk assessment of such investments. This is true for strategies of control, if they consist only of investments in liquid assets, but instead the historical prices of assets need to take daily dynamics account Manager. Unfortunately, the risk of investment in the illiquid and even more so in illiquid assets can not be assessed”.

In other words, the risk of loss can be assessed simply by looking at the price chart of any financial instrument or the performance of the investment strategy of the asset Manager over a sufficiently long period of time. Can also be asked to provide information about risks directly from a broker or custodian through which you intend to work in the financial market.

“The risk is usually stated in the form of standard deviations or maximum historical drawdown, “explains the CEO of the company “Personal Advisor” Natalia Smirnova. — Standard deviation, if crudely shows how much the actual outcome of an investment instrument may deviate from the average. For example, if the standard deviation is small, say 5%, this means that the actual outcome of the investment will be in the corridor of plus or minus 5% from the expected average rate of return with a probability of 68.3%; plus or minus 10% from average yield — with a probability of 95.5%; plus or minus 15% — with a probability of 99.7%. If the risk is described in terms of maximum drawdown, it shows how many percent of a particular tool as much as possible down in its history. These data typically include an investment company that offers certain investment instruments”.

“Demand from the financial company data results offer you the investment strategy over the entire period of its existence, — advises the head of Department of trading operations of the group of companies “Finam” Sergey Dorogavtsev. — If you specific returns are not given, it means that something is not right here, I personally would not trust money for the company. In addition, ideally, these data should include different periods of crisis and calm periods of market growth. I remember in 2010 a investment company was shown data for the last 1.5 years, i.e. during the period when the market recovered after the slump in late 2008. It is clear that the yield was crazy for virtually any strategy simply because of the overall significant growth of the market”.

“It is important to check the adequacy of the risk assessment, which gives you an investment company — adds Natalia Smirnova. For example, if you have before your eyes a description of the Fund in which risk is designated as maximum drawdown of 10%, but on closer examination you realize that you can’t understand his strategy (for example, a complex strategy of options and futures, plus shoulder), you can’t double-check the correctness of the risk assessment. There are chances that in reality the risk is higher. Therefore it is better to invest in tools that you understand well. For example, in the stock Fund American companies, when very easy to look at the history of S&P500 index and assess risks.

Money is like the expense

Suppose that the risks of the financial instrument or strategy of the management company you estimated. However, this is only the first step. The second, equally important point — to try on these risks. That is, to understand what exactly the amount to invest wisely.

A lot depends on personal preferences, but some General guidelines are useful to consider. “First, never invest in the financial markets with borrowed money, no matter what magic the profitability of these investments nor promised — advises Sergey Dorogavtsev. — These investments can greatly increase your risks. Second, the allocated investment of the money needs to be “long” — you need to be sure that for at least a year will be able to manage without them. Otherwise, there is an option when you have to withdraw money from the market in the most unfavorable moment and to incur financial losses. And finally, the third point is psychological. The market is unpredictable, possible sharp movements both up and down. It is important to be mentally prepared for the fact that in a period of time you will suffer losses, and, relatively speaking, to do in these times without validol and ambulance — health is more expensive. If you have doubts that it will be able to choose a more conservative strategy with less risk”.

Good advice

Not less important question — how much to invest in the financial markets. It is clear that to invest in risky assets is unwise. On the other hand, these attachments are designed to bring the highest return, so if you invest too little, then your savings will depreciate because of inflation.

Experts advise to begin to assess the overall level of personal savings, which can include not only cash, but also, for example, a property that is not vital, or a share in the business. Then determine what portion of savings are you willing to invest into investments in the financial market.

“If you exclude money, the savings include only those assets that can be sold and the money used for other expenses. So, for example, property which is necessary for living, attributed to the savings incorrectly. The same applies to business, if you don’t plan to abandon it. The maximum amount that can be invested in risky assets should not exceed that part of your savings, about which you almost know that in the coming year these funds will not be required for expenses,” says Gorchakov.

“The combined portfolio includes all the assets that you employ to achieve the goals, but that you can control,” says Smirnov. — There are and deposits, and business and real estate, and even if it is not for rent, but you expect her sometime in the future to use for some purposes, pension savings (but only your personal, not state pension, which you cannot control). You can also include and the expected inheritance, but it will be a contingent asset, since you don’t know the date of transfer of them to your property. The share of risky assets in the portfolio depends on the investor’s propensity to risk, as well as the time and the importance of the purpose for which these investments are made. The smaller investor is willing to risk, the more important the goal and the smaller the period before it, the smaller should be the share of risky investments. But even for a terrible speculators, I would not recommend more than 30% of the total portfolio placed in risky assets.

“Never keep all your eggs in one basket,” says Dorogavtsev. — Ideally, should spread savings across different types of investments. For example, one third to invest in Bank deposits, one third in property or business, private or friends, and a third into the financial market. At the same time investments in financial markets also better to distributed evenly: some — in conservative instruments such as bonds or low-risk strategies, some in high-risk”.

In addition, experts note that in addition to the own assessment of its investor appetite for risk there are General guidelines. For example, young people are more suited to aggressive portfolios, which can strongly lose in the price in some periods, but in the long run generate more income. The elderly, on the contrary, recommended a conservative portfolio with minimal risk. The total formula looks like this: 25 years in portfolio, it is better to have 90% of risky instruments such as shares and 10% conservative, like government bonds, to the age of 60, this proportion should gradually change to the opposite — 90% in bonds and only 10% in shares.

The rainy day Fund

However, even if you properly assessed the risks and allocated investments in different baskets, it does not guarantee you from trouble. The fact that investments in financial markets, and in other areas, not always easy to bring back. The market slumps, when assets are getting cheaper; to sell them at such times, unreasonable. The property quickly to sell at a reasonable price, in principle, difficult. Even Bank Deposit if it is long term, turn into cash without loss of income impossible.

Meanwhile, the money you may need at any time — for example, in connection with the loss of a job, need expensive treatment, and if just turned up a good sale or deal.

So part of the funds needed to keep on hand — just in case. Experts advise to calculate the amount of such nest egg based on your level of consumption. At the same time to keep the money in cash is not recommended, at least for reasons of safety — even from the Bank of cells money is sometimes lost.

“I would advise you to form a financial reserve from investments in short-term deposits or deposits that permit withdrawals, as well as from investments in short-term bonds, which are rarely much cheaper,” says Dorogavtsev. — This provision is highly dependent on the individual characteristics of the investor, such as options in case you need to quickly find a new job. But in any case it should not be less than the average amount of expenditures on current consumption for three months.”

“The reserve shall be not less than the average three-month expenditure, even better — from a six-month consumption, says Smirnov. — If a highly aggressive portfolio, that is, high-risk, you should reserve the cost of the 12-month period, so that in the event of unforeseen expenses had to sell aggressively or illiquid assets and incur financial losses.”

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