A good bartender in a cocktail bar prepares a great cocktail menu to ensure any client coming to the bar will find a drink for every situation in life: for celebrating a success, for relaxing moments with friends or to wind down after a tough day at work.
Likewise, you may look for a well prepared “cocktail menu” in the world of structured products, because the key advantage of structured products is that they allow you to make profitable investments in any market environment: upside, sideways and downside markets. In each market scenario, you may choose a different tactical investment, depending on your key objective. For instance, if you expect a downside market you could take a risk averse view and protect your portfolio or take a risk seeking view and “bet” on the market going down – these two objectives are very different and require a different tactical investment.
How to find the right investment product at the right time?
Therefore, if you want to prepare your own repertoire of tactical investments you may want to think about two dimensions – the expected market environment and how much risk you are prepared to take in that market environment. This effectively creates what I would call your tactical investment matrix. Then, you may want to assess which product payoff fits into each box of the matrix. Have a look below at an example for such a tactical opportunities matrix, which is effectively a “cocktail menu”. Please remember that we are not providing any investment advice on this website. We are simply providing insights, guidance and examples that may help you make up your own investment decision matrix.
How to build your own tactical investment arsenal?
In the example matrix below you see market scenarios on the y-axis and the risk appetite on the x-axis. Sample products are indicated in each box of the matrix and the colours indicate the four structured products categories. The level of risk appetite is important, since it indicates how much you are prepared to lose if your market expectation turns out to be incorrect. For instance, the “very high” risk appetite categories mean you are prepared to lose up to 100% of your tactical investment. “Medium” means you are prepared to take similar amounts of downside risk as a direct investment in the underlying asset.
If you want to use structured products frequently it may make sense for you to write down your own version of the tactical opportunities’ matrix by only using products that you feel comfortable with and products of which you understand the risk return profile. You may also leave some boxes empty, meaning in some scenarios you don’t feel comfortable making any investment. In case of doubt, you may want to consult an investment advisor.
The greatest accomplishment of a bartender lies in his ability to exactly suit his customer.
Harry Gordon Johnson
Straight up!
- To enhance your tactical investment arsenal, think how much risk you are willing to take (=how much money you are prepared to lose in the worst case scenario
- For market scenarios where you have a strong view on what may happen (markets crashing, booming, going sideways)check which products fit your expectation and risk profile–and make sure you understand their payoff and risk profile!
- Writing down the different market variations and risk profile in the form of a matrix may help you to be more systematic in your tactical investments.
