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The Investor spectrum

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So you want to invest? How do you go about it? And if so, what assets are available to you for generating future wealth and income?

Investing has become a popular alternative to fixed term deposits over the years, more and more now that we find ourselves in a low interest rate environment. A number of options are available to individuals across the age spectrum 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, as per 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 off equity investments, assuming they have the potential for a longer investment horizon, no immediate families to support and/or major expenses to finance. The risk-reward trade-off of investing in equities at a young age is usually the optimal decision, given 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 on an ongoing basis.

Keeping the same suitability profile in mind, middle aged individuals’ optimal investment decisions vary and usually range from diversified mixed portfolios consisting of equity and debt instruments, down to conservative fixed income or risky equity allocations. One’s ability and willingness to take on risk are big determining factors behind a recommended asset allocation.

Taking an individual with a family to support, a mortgage to pay back and other chunky expenses, 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.

Having said that, performance depends on what underlying assets have been included in a diversified portfolio. Meeting with an investment advisor is usually the most suitable option when the investor has no prior investment experience.

Finally, investors finding themselves close to or past the pension age know they should have limited tolerance 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 individual on this end of the age spectrum. Exceptions apply to the wealthy, though the majority of pensioners find themselves reliant on monthly income once they’ve reached the retirement age.

In Malta, government bonds and local fixed income securities are very popular amongst the middle aged to pension aged investors with the younger generation, albeit also investing in the above, opting more towards 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 in where to invest, given their preferences and suitability, though the rational investor will almost always consider the opportunity cost beforehand, that is the benefits of an alternative foregone for a preferred choice today.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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