How to plan investments: time and risk propensity

Short, medium, long times – in finance – are something not perfectly definable. A very relative concept, also changed over the years. In reality, if this distinction can be useful for categorizing needs, it could instead be harmful for identifying the financial products that should respond to these needs.

In other words, they are the objectives that may be short, medium and long term. For example, in the short term there may be the purchase of the car, in the middle the school for the children and in the long term the pension for both spouses.

The investor who, also through the family budget, has identified the main objectives for his savings, subsequently finds himself facing the problem of the financial instruments to be prepared to satisfy them, the so-called asset allocation.

It is generally thought that for each type of requirement there is the suitable product. According to a school of thought (not without criticism), for rigid objectives of a distant future it will be necessary to turn to long-term rigid products. For example, a life insurance policy is needed to build a supplementary pension or to send children to university.

Planning investments: time depends on objectives, risk propensity defines the financial instruments

But if it is true that there are essential needs, it is equally true that in some moments of life other priorities can take over. In this case, getting out of rigid instruments (such as life insurance policies) becomes, if not impossible, very expensive. Having guaranteed a pension but having lost one’s home in favor of the bank because we have not been able to pay the mortgage, I don’t think it results in anyone’s goals.

That is why it is possible to say that, in a sense, the long run of financial instruments does not exist. Often it is just an invention of those who pack them and then sell them.

Thus, with the exception of pension funds for which a long stay is necessary, and of those products for which guarantees or bonuses are activated only at maturity, all other instruments that are defined as “long-term” are so because they have costs of entry or exit which can only be amortized over a long period of time. These instruments (such as life insurance policies) can be doubly harmful: a first time for their little or no flexibility, a second time for their inefficiency.

Since the needs to be met are those of the saver and not those of the sellers of financial products, it is a good rule to favor products that are simultaneously efficient and flexible, both for short term and long term objectives.

t will be only the risk propensity of the investor, or rather the maximum loss that can be supported by his capital (a variable by definition variable over time) to guide the choice between more or less risky products.