Our management model for financial investments is to invest in a variety of financial assets which offer different risks and returns, so that this combination generates the expected returns within a determined period of time. In a very simplified example, we consider that there are three main types of investment:
- High risk investment: equities and derivatives. In normal circumstances a portfolio invested directly in stocks and shares in the western markets – the United States and Europe – has generated an average return of approximately 12%, plus possible gains from dividend payments. The risks associated with this type of investment (volatility) have been approximately 18%. These two elements of return and volatility have been badly affected over the last two years as a consequence of the financial crisis (which still continues), particularly with regard to the level of risk.
- Medium risk investment: fixed income returns over the medium- to long-term. To generalise: a fixed income return is the issue of debt by a state government or private company; it has two major risks. Firstly, the creditworthiness or solvency of the issuer, which means their ability to pay the returns and to repay the capital investment on maturity. Secondly, a variation in the market interest rates – if these go up, the fixed income investment can depreciate in value. The expected return for this type of investment is in the range of 3% to 6%.
- Low or zero risk investment: these are commonly investments in the money market, such as treasury bills and bank deposits, where your only risk is the solvency of the financial institution holding the investment. Interest rates on bank deposits are greatly affected by the commercial needs of attracting money from banks and building societies, and an expected return is between 0.5% and 3%