Whatever Your Risk Profile, There’s a Unit Trust for You
18 Apr 2018 | Back to Blog
Risk versus reward – it’s the age-old dilemma that goes hand in hand with investing. We all want great returns, but once the relevant risk factors are considered, our individual boundaries become apparent. The magnitude of potential returns is directly related to risk, so investors with a higher risk tolerance usually have the best stories about how they did with a stock purchase or IPO buy. For more conservative investors, while diversification is less exciting to talk about, it’s the way to reduce risk while creating a stronger portfolio.
Diversification is widely known, if only in principle, as spreading your eggs across several baskets. A portfolio’s risk drops considerably when additional stocks are added to that portfolio, even if the individual stocks are all of similar risk. Regardless of your tolerance for risk, the important things to discuss with your Wealth Advisor are what those baskets are made of and how many eggs to put in each.
Targeted investing with very little diversification makes sense for aggressive investors. At the other end of the spectrum, conservative investors need to be fully diversified. For most of us, who fall somewhere between the two, a balanced approach to diversification is the way to go.
Ideally, you want to diversify in such a way that all your investments aren’t affected similarly by the same changes in market conditions. So having investments in two different industries that are both affected by oil prices, for instance, is not as good as industries that respond differently to changes in the price of a barrel. Likewise, diversification of sovereign bond investments means looking at countries whose economies aren’t closely related to each other.
A portfolio can be diversified by currency, country, industry, asset classes and by security. One easy way to achieve this is by investing in a Unit Trust Fund. Each fund is already diversified, carrying a certain level of protection against possible risk, but you can also invest in a combination of Unit Trust Funds. Our Bond Fund I, for example, is a US dollar denominated fund made up of short term sovereign and corporate bonds. Even with a low risk profile, it outperformed all other bond funds in the market last year, delivering over 7% to investors. Our Equity Fund is a Jamaican dollar fund consisting of local stocks. This fund has a higher risk profile and delivered returns of over 30% over the same period.
It’s easy to see how you can increase the potential for returns to an otherwise conservative portfolio heavy with Bond Fund I units by adding some units from the Equity Fund. At the same time, the risk profile for that entire portfolio would still remain relatively low. With our range of Unit Trust funds spanning stocks, bonds and real estate in USD and JMD, it’s possible to come up with a portfolio that achieves just about any desired levels of diversification and risk level. When you’re ready to formulate a mix that will suit you, give us a call.