Question: “How would you describe the level of your investment knowledge?”
Investment knowledge affects both the Asset Mix Asset Mix is the ratio of income-based investments and equity-based investments in a portfolio. It is used to set the basic volatility/return level of a portfolio. and the Core/Specialty Mix Core investments are large, diversified, actively managed, with relatively low volatility. Specialty investments smaller cap investments, usually dedicated to a single sector or market, aggressively managed, with relatively high volatility. in a portfolio. It should be considered when making any adjustments that increase the portfolio’s volatility.
We have to consider an investor’s investment knowledge when increasing the equity portion of asset mix based on how comfortable is the investor with the tradeoff between return and volatility.
The specific guidelines are:
For an aggressive investor with high return/volatility comfort or risk tolerance and average to sophisticated investment knowledge and experience, add 10% to equity investments.
For an investor with no strong view on return/volatility, leave the asset mix unchanged regardless of his or her investment knowledge and experience.
For a conservative investor with low return/volatility comfort or tolerance, add 10% to income investments regardless of his or her investment knowledge and experience.
An investor’s investment knowledge (along with financial means and risk tolerance) is used to determine the prudent maximum specialty amount recommended for the Core/Specialty mix.
The specific guidelines used to determine the adjustment to the specialty recommendation are:
For an investor with limited or no investment knowledge do not adjust the Core/Specialty Mix.
For an investor with average investment knowledge, 10% Specialty investments can be added.
For an investor sophisticated investment knowledge, 20% Specialty investments can be added.
Total specialty investments should not exceed 60% of total investments.
|
Investment Knowledge |
Adjustment to Core/Specialty Mix | |
|
Core |
Specialty | |
|
None |
0% |
0% |
|
Limited |
0% |
0% |
|
Average |
-10% |
+10% |
|
Sophisticated |
-20% |
+20% |