risk profile

ETFs

With so many ETFs of all shapes and sizes now available on the market, finding the right one to invest in can sometimes be a difficult choice for investors. Here are a few suggestions on what to look out for when choosing ETFs.

  • Align to allocation: First and foremost, finding the right ETF should depend on your own investment objectives, portfolio asset allocation plan and personal priorities.
  • Know your provider: Apart from market forces, how well an ETF performs can also depend on how it is managed. Investing with a reputable fund manager with experience and a good track record of delivering index performance is important.
  • Compare the costs: Costs are one of the more straightforward ways to compare ETFs and can be particularly important when you are selecting between sometimes similar products.

Paraphrased from Vanguard

ETF Comparison List

Ordinary Shares

There are usually 2 schools of thought with choosing shares

  1. Fundamental analysis evaluates securities by attempting to measure their intrinsic value.
  2. Technical analysis differs from fundamental analysis, in that traders look to statistical trends in the stock’s price and volume.

Being a bit of a cynic in this area of late, I think a lot can also be put down to common sense on macro environments. you can try using some ‘deductions’ such as ‘Lithium prices will go up in the next few years due to x, y, z’. With that in mind, find some shares in those sectors.

An example I’m hoping to bank on is corona virus on the Travel and Flight industry. Hoping they recovery in the medium term should yield some results as the share prices are currently at very low rates compared to pre-COVID19.

Penny Stocks and Micro Caps

Much of this is fortune telling, but if you’re willing to put in a lot of time and research and have a knack for geology, you could do well with the mining / exploration companies. Otherwise you can try using some ‘deductions’ such as ‘Lithium prices will go up in the next few years due to x, y, z’. With that in mind, look at some micro cap companies exploring for these precious metals. Look into the announcements and other macro factors look for things such as

  • Can they survive on their current cash balance?
  • Are their deposits likely to yeild solid results? Could compare to other explorers in the area.
  • Always be conscious of the price of the underlying asset e.g Gold Explorer prices will go up if the intrinsic price of gold also goes up. 

List of ASX Companies by Sector

‘Professional’ Micro Cap Investors – Next Investors
You can also see their current portfolio

Crypto Currency

To be honest, it’s all guess work here. 

I have heard this guy is good though. 

Market Prices for Cryptocurrencies

I have created the below cheat sheet to get an idea of the risk profile of investments. These are not ALL investment types, but the ones I want to discuss.

Cash
This is essentially 0 risk. Hold your cash (emergency funds + funds not ready to be invested or holding for other opportunities)

Property
Can be a good way of earning capital growth (Capital growth is an increase in the value of an asset or investment) Through appreciation of house prices or income through rent (or both!). However the initial investment for one of these warlocks these days is so high (in Sydney anyway) that we’ll tackle this in another post. These kinds of investments could help you build and make that deposit, so read on!

Types of Shares – Ordinary Shares, ETFs & Penny Stocks
Yes, they are all the same things but slightly different. In terms of variety of risk, shares have the largest spread. They can range from low to high, it all depends on the company you chose to invest in. Before we go into this, let’s understand ETFs.

  • Ordinary Shares – this is a SHARE in a company. So if the company does well, so will you (in theory).
  • ETF – An exchange traded fund (ETF) is a basket (or bunch) of securities that trade on an exchange, just like a share, so when you own a share of an ETF, you will own a little bit of all shares in the ETF.
  • Penny Stocks – A penny stock typically refers to the stock of a small company that trades for less than $1 per share and hence the name penny stock. They seem very cheap and you can usually buy a lotttt of shares and then small changes in the price of the shares can make you very rich or poor.

How do you differentiate between high and low risk?
Think – Risk types. A good detailed document can be found here. But I think they are quite easy to understand with some common sense.

  • Volatility risk: how big the swings in price can be. I.e penny stocks and mining / exploration shares can have very high fluctuations. If good news comes in boom, if not, bust.
  • Timing Risk: Think COVID. Airlines are struggling right now so the share price is probably low (or is this an opportunity?).
  • Legislative Risk: i.e Cannabis could be announced as legal
  • Currency and Foreign Exchange Risk: Many companies operate world wide. If they have significant operations in Japan and an earthquake happens – potential busto.
  • Sector or Market Risk: Technology / mining / Travel / Gold could boom. Which market is your share in?

Generally, with higher risk comes higher (potential) return
I think that’s enough said here.

  • Barriers to Entry & Effort
    Barriers to Entry here is essentially how much money you need to get started in this space. At least with CBA the minimum is $500 to purchase a parcel of shares. Whereas a house is roughly going to set you back 10% of the purchase price. (Kel’s friends recently purchased a $2m house, so that’s at least $200,000 just to get started!). It may also be hard to set up trading accounts, although it’s very simple see my – Shares Part 1 – Setting Up A Share Trading Account.
  • Effort: How much time do you want to spend monitoring and investigating your investments? With MOST ETFs, you can generally just sit back and trust that someone smart is doing the hard work for you (that’s why they take the management fee). Otherwise you might find it fun to research penny stocks and play ‘Where’s the Gold’ and get some Lucky 88!

Crypto Currency
Who even knows with this stuff – it’s literally gambling so if you want to spice it up a bit – I suggest Compound – for no reason other than I saw it somewhere in my crappy newsfeed.

Next in the series we’ll look into:

We know how much to invest from the previous post: Investing Fundamentals: How Much Do I Invest?

The next concept we want to think about is where we should be placing our money and this allocation will be based on the risk of the investments. 

You might be familiar with the concept of risk-reward, which states that the higher the risk of a particular investment, the higher the possible return. This will help us to apply some sort of logic to our own circumstances and give some guidance around allocating our funds based on risk and return.

Each investment will have a different risk profile and some more risky than other. Example, a small exploration mining company without any certainty on finding something will have a higher risk than a large established ‘safe’ company like CBA.

From here on I’m NOT going to consider Cash sitting in the bank as an investment – that is part of your Emergency Fund established in the previous Post. Here on, investments are anything other than bank deposits.

Investment Pyramid

Each person will have different risk profiles depending on their situations and life experiences. Use the Quiz below to get a feeling of your risk profile and how you can start looking at structuring your investment portfolio:

Risk Profile Quiz

Example Portfolio Allocation based on Risk

Now that we have a better understanding of what OUR Risk Profile is, let’s look at what kind of assets we should start investing in based on this profile. See the next Post in the series: Investing Fundamentals: Investments Based On Risk Profile