Creating low risk investments portfolio, is a proven way of saving yourself from dealing with valuation errors, market volatility and financial risks. As an experienced and skilled investor, you need tried and tested low-risk investment strategies under your belt.
This article looks at the three most effective strategies to help you get the results you want. Let’s dive in investors!
1. Portfolio Separation Investment Strategy
The first strategy is portfolio separation which entails dividing your portfolio into two or more sub-portfolios. Each sub-portfolio should address a specified level of risk.
For this strategy to work, remember to periodically adjust the weight between adjacent sub-portfolios accordingly. For instance, you can use a signal such as systemic risk index to help you identify early risk warnings.
Additionally, your portfolio should rebalance itself each time the switch signals occur.
2. Rank-Based Portfolios Investment Strategy
Second on the list is a ranked-based portfolio which many systemic investors prefer. It comes with a pretty straightforward operation, so you won’t have a hard time following.
In a rank-based portfolio investment strategy, investors use metrics like downside volatility, and expected shortfall to sort assets. Once you do, you can choose assets that come with low risk over the riskier ones.
In fact, the riskiest of them should be discarded. Such portfolios usually present proportions that are inversely proportional to the risk. Which means, the higher up an asset is, the lower the investment risk.
You’re supposed to divide proportions between countries and sectors to reduce the concentration of certain risk factors. Like the first strategy, your portfolio should be able to rebalance itself periodically.
3. Optimization-based portfolios investment strategy
Last but not least, there is the optimization-based portfolio that derived from the Modern Portfolio Theory. If you go with this investment strategy, you need to optimize your portfolio quarterly.
You need to be explicit about the optimization and use quadratic mathematical programming algorithms. Alternatively, you can also go for linear or non-linear mathematical programming algorithms.
When optimizing your portfolio, be sure to work with a wide variety of metrics. Each metric you choose, should be an objective function as well.
Investment comes with a lot of risk and as an experienced investors, you should have a risk management system. These three tried and tested strategies ensure that you choose the right investment and get reasonable ROI in the end.