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FACTORS TO CONSIDER IN PORTFOLIO SELECTION
DURATION OF INVESTMENT
The choice of investment alternative between various physical and financial assets shall be influenced by the investor’s goal and time frame to achieve that goal.
RISK-VOLATILITY OF INVESTMENTS
Volatile investments are considered to be of high risk because their value fluctuates. An example of a high risk investment is shares. However this type of investment tends to do better over the long-term. On the other hand, some low risk investments, (e.g. Treasury bills) have a predictable rate of return. Therefore such investments are preferred for short term goals.
RISK-TOLERANCE OF INVESTOR
Investments are chosen not only according to goals and the amount of capital available, but also according to the individual’s risk tolerance levels. This means that an investor needs to determine if he is a risk-taker or not. The individual is then able to decide whether to take on an aggressive, moderate or conservative investment strategy. Below is an illustration of the investment strategy in relation to risk ability: Risk Ability
| Type of Investment Strategy
| Examples of Investments
| Risk Taker
| Aggressive:Investments with a high level of fluctuation
| Equities
| | Moderate Risk Take | Moderate:Combination of High and low risk investments | Equities and Fixed Income
| Risk Adverse
| Conservative: Perserves capital, usually interest earning | Fixed income e.g. bond, fixed deposits |
According to several schools of thought, an investor can develop an investment portfolio based on personal characteristics as shown below:
DEFENSIVE INVESTOR
This investor eliminates all investment volatility in favor of guaranteed securities. The goal of this investor is to protect capital, using safe investments which give a definite return. A Money Market Fund is recommended for this type of investor as well as for investors with short term objectives.
100% Money
Market Fund
CONSERVATIVE INVESTOR
This investor opts for a measured amount of price volatility in expectation of slightly higher long-term returns. One of the goals of this type of investor is to ensure their investments keep pace with inflation so that the value of their investment retains its buying power. They expect negative returns to a certain limit.A combination of 80% Money Market Fund and 20% Balanced Fund is recommended for these investors
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