In today’s article, we will of course be talking about finance, but also about health, about the different risk profiles when it comes to investing in financial assets. And if you’ll permit me, we’ll also look at how it all relates to sport and, more specifically, cycling, a pursuit now well established in our country and which I love.
You might wonder how all this can be related. Well, those who know me know that I enjoy putting disparate ideas through the same “mincer”, shaking it all together and distilling it all into something that I believe could make sense and apply to real life.
It is widely understood and accepted that investors fall into four distinct risk profiles. Ranging from least to most tolerance to risk, these profiles are: conservative; balanced; dynamic; and aggressive. The rules of the game in the world of finance increasingly assume that the main player, i.e., the investor, will always be informed and knowledgeable about the different financial assets that may make up their investment portfolio. But do they fully understand them? A client having a dynamic or aggressive risk profile does not necessarily mean that they know more about markets and that we can invest more or less in complex and/or difficult to explain and understand products.
In essence, the risk profile and/or tolerance go hand in hand. It is the investor’s capacity to tolerate losses, when they occur, in an investment profile. And here lies the crux of the matter, in having enough guts to face some difficult moments on the market, such as global stock market corrections, geopolitical phenomena or religious/social upheavals, which can shake the apparent controlled normality of our world.
From the start, when we meet with clients, this risk profile is agreed. But this can evolve, because it takes mental strength and patience to see that investment portfolios should normally perform in proportion to risk tolerance. When turbulent times come and most of the media say that volatility in the financial market is increasing and affecting our investment portfolios, we, the investors, must be able to maintain them or adapt them if necessary. We are very familiar with the financial assets invested and we know, without wishing to over generalise, that every asset must return to its real price or value when the “storm” passes.
It is at this point that I’d like to bring sport into the equation, and in particular the world of cycling.
Just as we talk about risk profiles, we also could talk about profiles or degrees of gradient as a percentage that a mountain pass, so common in the Principality, could have. The steeper the gradient, the greater the effort and the greater the pulmonary, physical and, above all, mental capacity required by the cyclist. If we develop this idea, just as the investor is asked to have patience in their investments, the cyclist must regulate their physical and/or emotional intensity when they are ascending a mountain pass or col, such as Gallina or Rabassa. For the uninitiated, both have explosive climbs with very specific sections that require a lot of physical and mental training to be able to achieve the goal and reach the top of the pass. In the same way, riding from the centre of Andorra la Vella to Seu d’Urgell—a very typical route for cyclists and which could be extrapolated to more conservative investor profiles—cannot be compared to riding from Sant Julià and climbing to Port d’Envalira, crossing the entire country—more suited to experienced dynamic and aggressive profiles. Each route entails its own characteristics, effort and emotional well-being, just as an investment in financial assets may have, right?
How far-fetched is this analogy? I believe it makes some kind of sense. In the end, if everything fits together and the financial markets behave somewhat normally, when we sell or amortise a financial product we should feel satisfied not only in an economic sense but also emotionally, in the same way that a cyclist breathes a sigh of relief when they get home and have been able to enjoy the ride from start to finish thanks to their previous preparation.
Diari d’Andorra 12.06.2024