IMPACT is a pivotal feature of portfolio management to evaluate a potential investment, before confirming the decision
Portfolio performance and exposure to market risk have been the focus of Pininvest from the start - and this continues to be the case
Performance benefits from the attention of every investor, but portfolio returns come at a price which, wittingly or unwittingly, is the investor's exposure to market risk
This is why Pininvest systematically reports the relation between performance and risk, measured in terms of price volatility, across all the applications on the platform
- Indices
- Assets - Equities and Funds
- Themes
- Portfolios and Portfolio Reports
For consistency purposes, volatility is always annualized : price variability observed over any chosen time frame is extended over a full year (252 trading days)
Proper in theory and relevant in practice, conclusions drawn jointly from portfolio performance and risk suffer from one blind spot - relying on computations after committing to a new investment
To evaluate how a selected set of assets will modify the portfolio outlook, the command button Invest Selection launches IMPACT
IMPACT is a virtual environment where investment ideas can be tested on a portfolio, and potential impact on performance, volatility and distribution shown in real time, before the final decision to invest
IMPACT - How new investments affect a portfolio's outlook
Individual investment decisions might be spurred by the positive market outlook of an asset, its competitive advantage or - as is often the case in the technology sector - disruptive features
However, correlations of the new asset in the destination portolio are the crucial factors in overall performance, risk and diversification
While important, performance and potential risk of a new investment matter less - from the investor's perspective - than its correlation with the assets already invested in the portfolio
To evaluate how a selected set of assets will modify correlations within the portfolio, the command button Invest Selection launches IMPACT
On IMPACT, the planned investment is simulated in a virtual environment - allowing for adjustments to asset weights before confirming the investment choices
Weight and correlation of new investments may positively impact portfolio volatility and diversification, depending on the tightness of relationship between price movements of all portfolio constituents
Less closely correlated assets favor more unconstrained individual price movements - lowering portfolio volatility and improving diversification
The respective weights of the asset positions - preexisting and new investments - contribute to the expected portfolio performance
Underlying the investment decision, the benchmark chosen by the investor and the risk profile targeted for the portfolio set the risk margin which is deemed 'acceptable' in terms of portfolio volatility as price for an expected performance range
IMPACT relies on the covariance matrix running in the background, reflecting the degree of correlation between the price movements of the different assets - both new potential investments and current portfolio constituents
This is how the charts reflect potential portfolio sensitivity to new investments
However, covariance is based on historical price series which ultimately determine expected return, risk and diversification
The assumption that future trends will align with the past is of course improbable, but still remains indicative amidst uncertain market forces
Return - expected if the past price momentum holds - is a weighted sum of asset returns (including dividends paid), as if all assets (including the new investment under consideration) had been part of the portfolio at the start of the period
Risk - a measure of portfolio volatility, annualized to streamline comparisons - is a relative concept, of special relevance in comparison between portfolios and with benchmarks
Diversification - a critical parameter in evaluating the contribution of a new investment to the portfolio - marks by how much the weighted asset mix of volatile assets lowers the volatility of the portfolio
Contribution - Sizing up how much the portfolio constituents matter
The percentage share of portfolio performance and volatility channelled to each asset - either currently invested or planned - ranks their 'contribution'
With a focus on outliers, such as extreme volatility, it might be straightforward to adjust their weights or to unload the position....
However, the impact on the porfolio could be unexpected : covariance might actually signal favorable correlations with outliers - reducing overall portfolio risk exposure
IMPACT - Creating a portfolio from scratch
The features of IMPACT are tightly integrated with the themes suggested on the Pininvest platform and with the bookmarks each user is free to record
By approaching the construction of a portfolio one step at a time, mixing assets of different theme with bookmarked assets, a virtual porfolio will track an investor's preferred strategy
- reevaluating portfolio performance, risk and diversification at each novel addition
- fine-tuning selections most likely to contribute to diversification and to lessen risk exposure
- considering investment choices which impact portfolio volatility favorably with lower correlation
Instantly updated, IMPACT evaluates each new investment in terms of portfolio performance and volatility, before actual inclusion in the selection
Proceeding by trial and error - and to do so stepwise over time - portfolio construction and expected performance will be reliably attuned to risk exposure as investment options are refined
The Pininvest platform allows the registered user to create 3 portfolios and to lay out distinct investment strategies for evaluation over time, facilitating each user's personal investment research
The features are not a substitute to each investor's analysis, but with end-of-day updates, every trading day, insights and individual preferences will be confronted to market trends
Portfolios might be defined as attempts to anticipate the future, with an eye on past trends
Risky because the future remains shrouded in uncertainty, the thematic portfolio construction suggested by Pininvest has the potential to dampen exposure to unanticipated market events