Risk categories for equity investments

The word "risk" is associated with a different conceptual content depending on the specialist area. In general, however, the term is defined as the possibility of the occurrence of a future event that may have adverse effects. In the context of the complementary term "security", however, it can also refer to an opportunity/risk profile, which is then presented with ranges.

In our "Serenity Strategy" we have already highlighted the importance of a person's risk profile . In the context of risk perception, it forms an essential basis for decisions in the investment business. Risks are usually perceived subjectively, so different risk takers often assess the same risk differently. For this reason, there is no absolute "right" or "wrong" when it comes to risks, but there is a qualitative risk analysis from which individual risk categories can be derived, depending on the area of expertise. By definition, these categories serve as an important guideline.

In the investment business, too, the gradation of risk categories can in principle be determined individually. However, the majority of market participants align themselves with the conventional standards. The scale always starts with "risk category 1 - security" and then leads via various levels of detail (e.g. conservative, income-oriented, growth-oriented) to "risk category - speculative".

Risk levels are also used in the risk categorisation of equity investments. Here, the standard corresponds to a total of four risk categories, which we also use within the framework of our model portfolio and for all of our equity recommendations. It should be noted that we link the classification of the risk category to the fluctuation risks of a stock as well as the percentage weighting within an investment portfolio. In the case of the fluctuation range, we rely primarily on historical data and assessments derived from this, as well as future analyses.

With regard to the quality of a share or a company, it should be explicitly stated here that every risk category can be populated with quality stocks. It is therefore our declared aim to focus on the best possible fundamental data, even in the case of highly volatile speculative stocks, whether in retrospect or primarily in terms of future developments.

Risk category 1 - safety-oriented
Safety-oriented risk category 1 is based on the assumption of low fluctuation risks. These tend to be "conservative" value stocks of companies with high quality, long-standing stability, a clear business model, a solid balance sheet, continuity of earnings, reliable dividend payments, etc.

The quality and fluctuation characteristics mentioned are automatically associated with the highest weighting within an investment portfolio within the framework of risk category 1 ; the higher the assessment of security, the higher the weighting. Specifically, we link the following parameters to our risk category 1:

Risk: R1
Fluctuation: Up to +/- 15%
Weighting at purchase: Maximum 10.0%

Risk category 2 - conservative
In conservative risk category 2, we still tend to be in the "safe" area of quality and stability. However, the stocks or companies assigned here are already moving slightly in the direction of "growth stocks", which as a logical consequence may have possible effects on the volatility of the business and price performance.

As already mentioned under "Fundamentals", a certain fundamental quality is the declared requirement in every risk category. On the other hand, the range of fluctuation increases in risk category 2, which can lead to a correspondingly higher loss potential in the event of negative stock market trends or negative company news in the meantime. The same applies vice versa in the case of positive news. Due to the risk of higher price fluctuations, the portfolio weighting in risk category 2 is also reduced accordingly. Specifically, we link the following parameters to our risk category 2:

Risk: R2
Fluctuation: Up to +/- 25%
Weighting at purchase: Maximum 7.5%

Risk category 3 - earnings-oriented
In earnings-oriented risk category 3, the main focus of the recommendation or investment is already on the "growth" of a company and, derived from this, on the "capital gain" of the share. Naturally, this also increases the fluctuation bandwidth and the portfolio weighting must or should be set correspondingly lower.

As explicitly mentioned in our "composure strategy" - in line with the required practice - the investor's personal risk profile can provide for other weightings at any time. However, this is not recommended, because if the estimated loss potential increases, the weighting should be set lower in return as a "rule of thumb". Whatever the individual investor decides, we link the following parameters to our risk category 3:

Risk: R3
Fluctuation: Up to +/- 50%
Weighting at purchase: Maximum 5.0%

Risk category 4 - speculative
With speculative risk category 4, we have now definitely arrived in the highly volatile area, as the name unambiguously indicates. As a rule, these will always be "growth stocks" with a positive assessment of potential. We would also differentiate between a "growth stock" with fundamentally positive conditions and future prospects and a pure "gambler's stock", which can then be subject to many hypotheses.

Regardless of what you call the share, the fact is that volatility is likely to be high to very high, which in the positive case leads to the declared goal of lucrative profit opportunities, but in the negative case can result in a correspondingly high loss potential. We state unequivocally here that equities with risk category 4 are only suitable for investors who also have a high personal risk profile (high assets, no mental and above all existential problems in the event of higher losses, etc.). In any case, we link risk category 4 to the following parameters:

Risk: R4
Fluctuation: Over +/- 50%
Weighting when buying: Maximum 2.5%

Finally, we would like to point out that there may be greater than expected price fluctuations in any risk category at any time. Furthermore, the weighting should always be well monitored and rebalancing (rebalancing the portfolio / restoring the strategic asset allocation) should be considered in the event of major changes in value.

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