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A sort of investment guide

2021.12.29 Vítor Ribeiro, CFA

Good year and good investments!


During 2021, we went through several themes that were transversal to financial investment, from the perspective of the individual investor, and that are part of the planning we must do when we decide to invest money.


Individual Wealth

We start by defining the management of assets, namely from the perspective of individual wealth, always with a very present behavioral component. We highlight how important is the investor's life stage, current situation, psychological profile and personality types. We also explore the various concepts of risk and the level of risk tolerance, namely regarding the willingness and ability to take risk. Risk management is very important in wealth management.

After collecting all this information, we will be able to make better decisions and better answer the question: how to invest money. More than chasing returns, our investment philosophy is to help investors make investment decisions taking into account their objectives, their risk tolerance and their preferences and restrictions. For this, we use the financial market, which is our machine for updating expectations. As the place where investors and businesses looking for capital meet to both meet their goals, the financial market is a leading indicator of the world in the future.


Sustainable Investment: ESG

Next to the management of individual wealth, we highlight sustainable investment, namely the acronym ESG (Environmental, Social & Governance). Sustainable Investment, or ESG Investing, is an investment approach that includes environmental, social and corporate governance criteria in the decision-making process with the aim of achieving long-term investor goals and a positive impact on the planet. We address the different sustainable investment strategies, the growth of this way of investing and seeing the world, investor motivations, what is changing in the financial industry and how we can invest sustainably.

Ethics, the environment and social responsibility make all the difference for our future. Therefore, the new mission is to invest with impact.


The Financial Plan

We make saving a priority for individual financial well-being. So the next topic was the financial plan. Financial planning allows everyone to set multiple financial goals over different periods. This plan makes us less likely to react emotionally and hastily to situations that occur. Good financial planning therefore means ensuring control and understanding the implications of each decision making. We list the reasons for defining a financial plan, the importance of defining objectives and the role of financial literacy in economic development and the credibility and professionalism of the financial industry and all its participants.

We take the opportunity to leave tips, golden rules to be rigorous in saving and the role of an advisor in order to help investors to develop a personalized financial plan and make the best investment decisions to achieve their goals.


Expectations for the economy and financial markets

To develop the financial plan, it is important to formulate expectations for the markets and the economy, as well as the relationship that exists between the economy and markets, which is not always well understood. We also define asset classes for strategic leasing. These classes can be segregated in a finer and more detailed approach into several subclasses that can be referenced by geographic location, sector, industry, style and even specific factors or trends.

The relationship between financial markets and economics is one of those intuitions that seems more than what it really is. There is certainly a relationship between economics and financial markets. They are interconnected. But there is one main difference: time. As stated by Elroy Dimson, Paul Marsh, and Mike Staunton, “investor decision-making tends to anticipate the future circumstances of the economy, and empirical evidence supports this assertion. Stock market fluctuations predict changes in GDP, but movements in GDP do not predict stock market returns.”

The definition of the strategy for the investment portfolio is the result of the investment policy and the formulation of expectations for the capital market. It's not about predicting the next recession or the unemployment rate a year from now. We want to build a mosaic of dynamic information, aimed at investors and allowing us to build a portfolio aligned with their goals and preferences. In the long term, the market information mosaic tends to be less important in the portfolio's evolution, with our own contribution standing out. And that contribution comes in the form of saving capacity, time and optimism.


Major Mistakes in Investment

All market participants - professionals and investors - are subject to bias and errors. This was the motto to address the main errors in the investment process and to explore the theme of behavioral finance. Just as we know our physical limitations, we know what we are and are not capable of doing, we also need to recognize our mistakes and cognitive and emotional biases. If we do, we will be in a much better position to make decisions and be better investors.

Therefore, we proposed a modified portfolio adapted to the investor's personal circumstances based on traditional portfolio models, based on the concept of diversification. We will hardly have a rational portfolio. We are not machines and we have innate behaviors. Therefore, the idea is to be able to mitigate or even eliminate the errors and biases of each investor by building an optimal and personalized portfolio.


The Investment Policy Statement

After analyzing the inputs associated with the investor, the expectations in relation to the markets and the economy and the process of building the optimal portfolio, we developed the theme of the Investment Policy Statement. This is an essential document, which forms part of the financial plan and aims to make each investor's assets future-proof. Establish guidelines, rules and responsibilities. It understands our behavior as investors, the reasons for investing, separates the noise from information and understands how the financial industry works.

For this statement, we also need to know how to define return and risk objectives and what the investor's preferences and restrictions are. We end this topic with an example of IPS and the process to be developed in case of changes and updates to the IPS.


Future Analyzer: A Computer Finance Tool

At the genesis of Future Proof is the desire to bring to wealth management and advising, in addition to behavioral finance, computational finance tools or financial engineering, as it is also known. Despite being associated with crises, complexity and deregulation, the truth is that computer finance should not be seen as the problem. In fact, the good use of these tools makes it possible to improve the portfolio's performance, in terms of risk and return, producing portfolios and results that are more adequate and consistent with the individual interests of each investor. And it should not only be available to so-called institutional investors or investment banks, as they end up distorting and making the financial market more asymmetric.

Future Analyzer is the initial result of this approach that aims to evolve into a broad investment ecosystem serving all investors. It is a purely quantitative service that uses inputs transmitted by investors (the current portfolio, for example) to carry out an impartial and rigorous analysis. The natural evolution, which is already in a testing environment, is PortfolYou.

This development is based on the democratization of investment and analysis tools, on the increasingly intense presence of retail investors in the investment industry and on trading platforms. Therefore, we analyzed the topic of investment and speculation as a basis for the DIY (do it yourself) investor.


Produtos financeiros e Inflação: alternativas ao dinheiro parado

The big theme of the year was inflation. It is a topic that is not always well understood, but it is extremely important for the investment portfolio and for long-term savings. That's why we've dedicated throughout this year some articles dedicated to the topic. In the article Do all roads lead to Inflation, we analyze the various perspectives and factors that could lead to a rise in the rate of inflation. And in 2020 we had already launched arguments regarding inflation or deflation. But for the investor, we have decided to take a more pragmatic approach with the theme Put your money to work and the dangers of inflation for savings. Inflation may seem like it doesn't affect us directly, but in the long run, even in the case of a controlled inflation rate, its effect can be devastating.

In order to make known alternatives to standing money and to answer practical questions such as which financial products we can invest in, we made a series of articles related to real estate, RSP, ETF and investment funds. These instruments, when well used and selected, can help us to achieve goals, fight inflation and better prepare our financial future. Gone are the days of typical term deposits or even guaranteed capitalization and income insurance.

The evolution of the financial world, of the macro environment and of financial literacy itself, led to the appearance of these instruments which, nowadays, are already considered within the reach of any saver or investor.

But evolution did not stop there. However, many other structures appeared, some regulated and some not, normally associated with technological disruptions, algorithms, collaborative financing and cryptocurrencies. Also in terms of real investments, alternatives have appeared, linked to art, real estate and even copyright (see the sale of copyright by composers such as Bruce Springsteen or Bob Dylan).


Fintechs are playing a key role in breaking new ground for the investor. This does not mean that the path is risk-free, on the contrary. It does mean that there are more opportunities and more options to build a diversified, goal-oriented portfolio.

The typical portfolio consisting of deposits, real estate, bonds and shares may evolve into very different portfolios in the future, including cryptocurrencies, NFT, peer-to-peer and crowdfunding and even investments in private equities (until recently unattainable to investors investment) and other actual investments (such as art or copyright).

The end of the year is the ideal time to take stock and make decisions.

The financial markets, in general, performed very positively in the last year, but in the meantime, we are beginning to feel an increase in volatility and uncertainty regarding such important issues as interest rates, inflation or future corporate earnings.

On the one hand, central banks are under pressure to reduce financial stimuli, on the other, asset valuations have soared to successive historic highs and we live, in much of the Western world, with very low or negative interest rates and an ever-increasing outlook more real inflation than average.


So what should we do about the investment portfolio?

The guide we made in this article can and should serve as a base, always. Hopefully it was useful and that it will be useful for the future.

Vítor Ribeiro, CFA
Vítor Ribeiro, CFA

Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.

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+351 939873441 (Vítor Mário Ribeiro, CFA)

+351 938438594 (Luís Silva)

Future Proof is an Appointed Representative of Banco Invest, S.A.. It is registered at CMVM.