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 assets and financial instruments to implement it.

A well-built, highly efficient and diversified portfolio could be a portfolio composed solely of mutual funds and/or ETFs of different characteristics and investment styles. We could even build a portfolio that tracks the overall market portfolio. It is an excellent solution with high risk adjusted returns over the long term. There are Robo Advisory platforms on the market that provide such portfolios, including mutual funds that track the overall market portfolio.

However, a portfolio built in this way lacks components that create an emotional connection and lead to greater engagement and learning. If we invest a certain percentage of the portfolio in certain individual assets with which we have certain preferences even in riskier assets, we substantially increase our engagement with little impact on the modeling and portfolio construction. The most important thing is to adjust the risk of the rest of the portfolio to allow the inclusion of these more emotional assets, which in most cases carry more risk.

We thus introduce the concept of an emotionally suitable portfolio, which allows us to be more involved and undoubtedly provides us in a controlled manner a certain dose of adrenaline that not a few individual investors are looking for.

José Luís Álvarez – CEO HollyMontt

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