Some portfolio types

Well, we have arrived at the final act of this guide, let's conclude with some types of portfolios. When building a portfolio, you must first establish the investment objective. You have to ask yourself, why am I investing this money? What do I want to achieve? How do I want to achieve it? Over how long a period of time? These answers will determine which choice of ETFs and/or ETCs you will invest in, since you have seen that ETFs, even with the same benchmark, may have different characteristics.

Obviously, they must be attainable objectives. Investing a thousand euros and hoping to make a million in 10 years is not feasible. Generally, those who invest do so to protect their savings from inflation, to have an annual (or six-monthly) income, or to supplement their pension when they reach the required age. These are all objectives that require different portfolios.

Next, you need to establish the time frame, i.e., how soon you want to achieve your goal. This depends not only on your age but also on the savings available to you.

Finally, you have to decide the risk you are willing to accept to achieve the goal, i.e., your risk appetite. As mentioned, greater gain also means greater risk. Investing in High Yield bonds allows you to earn more than doing so in U.S. government bonds, but the risk of default by an issuer is also higher.

Risk appetite can be translated as your tolerance to fluctuations, even sharp ones in some cases, in the financial products you hold in your portfolio. You must quantify this risk and only choose the financial instruments that allow you to respect this parameter.

You need to evaluate everything well. If a goal is only achievable in the face of raising the risk beyond your tolerance threshold, then perhaps you should review your priorities and veer towards something quieter and easier to achieve. Also wrong is increasing the size of your investment to achieve your goal. The savings you invest should not be used for day-to-day expenses and their momentary deprivation should not cause you problems.

Now it is time to look at investment strategies depending on what the goal you wish to achieve is. First, there is a distinction to be made about portfolio management. Your portfolio can be managed:

• passively
• actively

What's the difference? Managing a portfolio passively means buying ETFs and leaving them in the portfolio without making any changes for the duration of the investment. This has the virtue that you don't have to spend time on them, at most a few hours a year, and the costs are ultimately almost negligible. However, keeping the same products in your portfolio at all times leaves it at the mercy of market fluctuations during periods of turbulence.

Actively managing a portfolio means buying and selling ETFs periodically as conditions change. It is immediately obvious that such management requires a lot more time dedicated to it, the costs increase due to the higher number of commissions paid for purchases and sales and it also requires a certain knowledge of the dynamics of the markets. The advantage is that you can modify your portfolio as economic and market conditions change. This translates into a higher performance with a decrease in volatility and, consequently, risk.

Regardless of which management you choose, you must respect your investment objectives and not get emotional, especially during turbulent market times. Everything goes well when the markets go up, the problems come when the markets go down. Too many investors panic and sell for fear of losing their savings, losing sight of the objective and time perspective.

I remember in 2008 when someone wrote to me saying they had invested in BTPs (Italian government bonds) and was worried about losing everything (or almost everything) because of the financial crisis and the collapse of the stock market. This happens when you don't have a minimum knowledge of financial education.

Now, briefly, as this journey is not a solicitation to invest, I will show you three types of portfolios based on different needs.

1. Guaranteed Capital Portfolio. It is a strategy used by many banks to ask for higher commissions. It consists of buying a zero-coupon bond and, with the difference between nominal value and market price, buying one or more ETFs. In the worst cases, this will mean you will receive the entire capital invested at maturity. For the sake of clarity, I will show you an example.

I invest € 10,000. I buy the XYX zero-coupon bond at 88.50 for an outlay of € 8,850 and with my available savings (€ 1,150) I buy an ETF. At maturity, the bond will return me € 10,000 (all my capital); the ETF will represent my gain.

It is a type of conservative investment, that has the purpose of conserving capital whilst revaluating it. In this way, the risk is zeroed (not really, there is always a risk, even if minor, of the issuer, defaulting) and on top of that, you have a gain, even if this gain is low. It is an optimal alternative to leaving the firm savings on your current account annually eroded from inflation.

2. Periodic Annuity Portfolio. Expenses: we all have them. Mortgage or rent to pay, children's school, medical or life insurance, etc. So, it wouldn't hurt to get a periodic annuity (usually semi-annual or annual) to alleviate costs.

First, you have to choose ETFs that distribute returns (and not accumulate them). Then, to create this type of portfolio you have two options:

• stocks
• bonds

You have to choose whether to use ETFs on the stock markets or the bond markets. There is a difference, which I will now elucidate. Of the two, it is generally the equity that distributes a higher return. However, stocks are less regular and more volatile and therefore subject to declines (even strong declines in some cases as has happened in the past). If in the long term, they do not you’re your investment any problems, they can however give you issues on dividends. Both because the year could close at a loss for a company, and because even though a gain has been achieved, the company may decide not to distribute dividends to shareholders (in practice, choosing not to distribute for that year but rather to accumulate).

Bonds, instead, are far calmer and more constant, without such great swings and, on top of this, are a lot less volatile than stocks and therefore more indicated for those who need a regular income coming in every six or twelve months. In my opinion, therefore, bond ETFs are to be preferred.

The second and final step concerns the choice of ETF. You have to choose a "high yield" ETF, which, all other conditions being equal (liquidity, physical or synthetic replication, currency, etc.) has the highest yield (dividend yield) (JustETF screener can help you make your choice).

Therefore, this type of portfolio is ideal for those who need to obtain a periodic income with an optical of the medium-long period. Moreover, it is low risk, being constructed entirely out of bonds (even if they are high-yield).

3. Retirement Portfolio. Whatever country you live in, it is well known that once you retire, what you receive each month will be less than your salary. You will be forced to use your savings to maintain your standard of living. This is a common concern for many people.

To get around this problem there are pension funds, whose main purpose is pension supplementation, or, much more simply, using accumulation ETFs.

The strategy that I adopt is the Accumulation Plan (but it is not the only one available). It consists of not investing all your savings immediately but rather breaking them up into monthly purchases or however regularly you wish (quarterly, six-monthly, annual).

This strategy is also great for people who do not have the capital to invest but who are able to save every month and put those savings into an accumulation plan, particularly young people. This is a subject that is very close to my heart, young people. They have two great allies in this strategy: lots of time in front of them and compound interest. Even with a little each month, a 25-year-old can secure a financially sound future.

Your age should decide which ETF to buy. If you still have many years before retiring, then the best strategy is to invest in an equity ETF (on world or U.S. equities) that guarantees better performance in the long run. If, on the other hand, you only have a few years left before retirement, then it is wiser to invest in a bond ETF (also global or U.S.) that is more conservative and less volatile.

The accumulation plan is very simple to implement, it does not require any special knowledge. It does not require time, at most a couple of hours per month. It solves the question of whether now is the right time to buy since purchases over time will give you an acceptable average price. You can customize it to your liking.

These are just three types of portfolios but there are many more. It's up to you now, if you are interested, to delve into this topic and build the one that best suits your needs.