Author: José Luís Álvarez - CEO HollyMontt

How to build an investment portfolio

The most common error when building a portfolio One of the most common mistakes when an individual investor build an investment portfolio with an objective other than to simply trade short-term in the financial markets with a few assets, is to keep on adding assets or products that are considered to be more suited at each outlook of financial markets, sector or asset.  The result of this is an aggregate of financial assets rather than an investment portfolio. In most cases, this is due to an unawareness of not only what a portfolio is but also that there is a methodology for building an...

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What are HollyTools?

The new tool available to individual investors to build and measure the risk of a portfolio of financial assets  What are HollyTools used for? HollyTools is a tool for learning how to build investment portfolios in a rigorous but easy and intuitive way. The HollyTools follow a rigorously grounded methodology that ensures you build your portfolio based on the risk you are willing and able to take, rather than solely on expectations of a particular asset’s return. In addition, you are provided with powerful algorithms that will allow you to not only understand the risk and simulate...

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HollyTools: our investment tools

Our investment tools are designed to help you learn how to build an optimized portfolio in a few simple steps. The HollyTools put advanced metrics and sophisticated algorithms at your disposal through a simple and intuitive interface. But what can this investment tool do for you? Besides being a powerful practical method to develop your learning as an investor, it is a simulator that allows you to understand essential metrics for an investor and generate different portfolios with different financial assets that will be very useful if you want to invest. A necessary tool for building investment...

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How to estimate returns with Beta (β)? (Part 4 of 4)

The Beta of an asset or portfolio can be used as a statistic to make investment decisions based on the estimates of the returns we can expect depending on the risks. If the factors that have determined the fluctuations in the past are reproduced in the future market (systematic risks), under normal market conditions, Beta is a statistic that can help us to also estimate the theoretical returns expected for a given asset or portfolio of assets’ risk. Expected theoretical returns estimation To estimate the expected returns of an asset or portfolio using Beta, we will use two methodological approaches...

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How is Beta (β) interpreted? (Part 2 of 4)

Beta measures how a particular financial asset or a portfolio of assets fluctuates with respect to the market. More specifically, the Beta coefficient informs us of the historical sensitivity of a financial asset’s returns against the systematic risks relative to the historical sensitivity of market’s returns (represented by its benchmark index) to those same systematic risks. The rule for its interpretation is that, the higher the beta in absolute terms, the more sensitive a financial asset has been than the market, to the same systematic risks.  Let’s take a closer look: 1. Direction...

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How to measure risks with Beta (β)? (Part 3 of 4)

The Beta of an asset or portfolio can serve as a statistic for making investment decisions based on risk. If the factors that have determined the fluctuations in the past are reproduced in the future (systematic risks), under normal market conditions, Beta is a statistic that can help us to estimate the relative risk of an asset in relation to an index of market reference (benchmark).  Risk estimation and management Beta only informs us of the sensitivity of the systematic risks of an asset or portfolio in relation to how the market reacts to these same risks. Therefore, it only serves to estimate...

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What is the Beta (β) coefficient in finance? (Part 1 of 4)

The Beta coefficient is a statistic that helps us understand market risk from a complementary perspective to volatility and other metrics that are used for this purpose. Market risk is the risk associated with the fluctuations that a financial asset has due to it trading on financial markets. Unique risks and systematic risks To be able to understand the Beta coefficient, we need to first understand how diversification affects the market risk of a financial asset, in particular company shares. Market risk is divided into two main types of risk: 1. Unique risks, idiosyncratic, unsystematic or...

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What is volatility and how is it interpreted?

We find a lot of information on social media about what volatility is, but often by trying to summarise it too much, it is not explained enough to be used in making investment decisions. This is especially true for an investor who wants to advance their knowledge without having to delve into terms too complex for their purpose. Volatility and uncertainty Historical volatility is the most popular statistic for estimating the market risk of a financial asset (fluctuations in that asset in the market). While there are other more appropriate and understandable statistics, historical volatility is...

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Risk analysis of investing in cryptocurrencies

In this article we will explain the risks that exist when investing in cryptocurrencies. Each asset class has specific risks that we will address in this blog.  We will look at the risks in the major asset classes such as cryptocurrencies, equities, commodities, fixed income and also financial derivatives (with particular emphasis on CFDs and binary options) which are financial products that use the aforementioned asset classes as a reference value (underlying). The informative purpose of these articles allows us to summarise and synthesise, focusing on the most relevant aspects, so that all...

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Is there a bubble in passive management?

In the market there is talk about whether there is a bubble in passive management, referring specifically to passive index management. Faced with this question that some people are asking, I have my doubts: Are they referring to the fact that this type of management causes a bubble in the financial markets or that the increase in the interest of this type of management is considered a fad? Let us briefly explain what passive index management consists of and why there has been a growing interest in this type of management for quite some years now. What is index management? In very general terms,...

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Trading for everyone: illusion and addiction

Trading “for everyone” There are more and more ads on social media for “trading for everyone”. Quick courses promising us that we will be able to earn money from the financial markets with short term trades by following simple rules that guarantee success.  There are people who tell us that they are professional traders with barely a few years of experience. In the industry, some people refer to these as “turbotraders”. Others who are more experienced and are sponsored by certain trading platforms are willing to reveal, just for us, their methods of laying golden eggs. Illusion The illusion...

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Value and price of an asset on the financial markets

Asset value The value and price of a financial asset are two different concepts and thanks to this difference they are bought and sold on the financial markets. The value is a subjective value and corresponds to the perception that each investor has of each asset’s capacity to generate future returns. Different estimations from value analysis There are different types of estimations for value analysis and these all correspond to the different methods that investors use to analyse the future behaviour of a certain asset. In simple terms, to try and summarise these estimations we can establish...

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For a new investor … (1/3)

… from a HollyMontt follower The idea behind writing this article is to make you reflect on both my experiences and the information I have been gathering for some time now. My aim is for you to benefit from my experience as you get started in the world of financial investments. Although it may not be a magic formula, I would ask you to seriously take my advice into consideration so that you don’t lose money before you start earning it. The purpose behind writing this is so that you don’t make the same mistakes as I did. Like many, my high expectations were soon frustrated when I first...

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Behavioural finance: psychology in investment decisions

What is behavioural finance? Behavioural finance analyses and identifies the emotional biases that influence investment decision making.  Faced with different situations in the financial markets, and due to our human condition, decisions are made that in many cases are not rational enough and are components of emotional behaviour. These emotional components influence us significantly and can condition us in an inadequate way.   For example, investors are willing to strongly buy when market expectations seem to be favourable and strongly sell when there is some uncertainty about the future. Excessive...

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What is an index fund?

An index fund is a type of fund which tracks the components of a financial market index of a certain stock market or asset class. That is where the name index fund comes from. Investing in an index fund which follows a certain stock market is like investing in a basket of the assets of the corresponding stock market of said index. If we invest in an index fund such as STOXX 600, it is as if we were investing in the most important European companies listed on the European stock exchanges, which are all included in the STOXX 600. That is why, just as with any investment fund, it is an excellent...

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What do we need to know before investing?

If you are thinking about investing money for the potential returns it offers, you should know that it may go well, but that there are always risks. That’s why we are going to give you some basic tips to bear in mind before making any investment decision. How much money are you going to invest? First of all, you need to decide how much money you want to put towards your financial investments. The markets are subject to change The financial markets are constantly fluctuating. The term volatility is the most commonused term to describe and measure the uncertainty provided by changes to theprices...

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Risk and portfolio optimization models

One of the criticisms of traditional financial asset portfolio optimization models is the empirical evidence that asset class correlations are asymmetric, i.e., the behaviours among assets is different in bullish environments than in strongly bearish market environments. The fact that investors diversify their portfolios is a fundamental principle of Modern Portfolio Theory. However, there are some periods when diversification does not work as well as desirable. Numerous studies have shown evidence that there is an asymmetry due to increased correlation between assets in severe market downturns,...

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How we select the assets in our portfolio

What do you need to know before making the asset selection? Before selecting assets, you should know the level of risk you are able and willing to carry (your risk profile) and decide the amount of money you wish to invest. You must keep in mind that your investment will be in an environment of continuous fluctuations. You must set a long enough time horizon to be able to assume those fluctuations. The money you are going to invest must be your financial surplus that you are not going to need in case of unexpected events. You should select assets according to a defined strategy (including preferences...

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Management styles and efficiency of financial markets

The different asset management styles and strategies are related to the different perceptions of how efficient the financial markets are. A financial market is efficient when the market price of a financial asset is an unbiased sample of all opinions about its intrinsic value. The market consensus on the value of that asset is what sets its price. For a market to be efficient, there must be no asymmetric information and all available information must be quickly incorporated into the price of financial assets.  When an analyst looks for investment opportunities, he implicitly believes that there...

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Value investing and non-rationality in financial markets

There is increasing empirical evidence of a growing structural dissociation between the co-movements of companies’ share prices in financial markets and the evolution of their fundamentals. This price formation environment in the financial markets is a consequence of the progressive change in the relative weight of the different variables that determine decisions to buy and sell assets, with more weight being given by non-rational decisions. By non-rational decisions we mean those that are not based on an in-depth analysis of the economic variables of a company, its environment and the...

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Balancing reason and emotion

To create an engagement between an individual investor and a financial investment, it is necessary to create an emotional connection. This emotional connection is complex and goes beyond expectations of returns or experiences of performance achieved. A key factor is the type of assets with which an investment strategy is implemented.  We introduce the concepts of a properly built portfolio and emotionally suitable portfolio. A well-built portfolio is mainly due to the adequacy of the risk level between this portfolio and the investor’s risk profile and to the selection of the most appropriate...

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What are the sources of returns investing in the financial markets?

There are two ways to make profits in the financial markets: Entering and exiting the market at the most appropriate times. This is called Market Timing. Selecting the best assets for our investment strategy. This is called Security Selection. Our thoughts on Market Timing For an inexperienced investor, even for advanced or professional investors, it is difficult to know when is the best time to enter the market to buy and even more difficult to know when is the best time to sell, especially when there is a lot of uncertainty in the financial markets.  Trying to seek short term profits from...

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Your investor profile

Each investor has unique characteristics: The amount of their current investments and savings Their capacity to generate future income and allocate it to savings Their personal and financial circumstances that may condition their liquidity needs Their motivations and objectives for saving Their discipline Their willingness to learn The time available for monitoring Their knowledge and experience Their risk aversion All these characteristics are called investor profile. Unless all these characteristics of your profile change, you must stay true to your investor profile. Bullish market environments...

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