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Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Thursday, April 14, 2016

Aboi: Defining Risk Rating Methodology

I am planning to revamp my Portfolio and Watchlist into a single page for ease of maintaining it. Furthermore I will remove all monetary values for personal & security reasons. This time I will likely only show [1] Total Returns [2] Holding Period [3] TWRR. In addition, I will introduce a revised risk rating ranking. In the past it was just Fixed Income -> Mixed Assets -> Equities.

Here's the new definition:-
Riskiness of asset from a scale of 0 to 10. 0 being lowest risk to 10 being highest risk. The risk level is relative to each other. E.g. Asset A has a risk rating of [4] while Asset B has an [8]. Using relative terms, this means Asset B is riskier than Asset A it DOES NOT mean that Asset B is twice as risky.

Also remember the correlation between Risk & Return:

Rating 0 (Lowest Risk)
Fixed deposit instruments, money market funds or cash management instruments.

Rating 1
Malaysian bonds (RM-denominated) with very little foreign currency exposure.

Rating 2
Non-Malaysian bonds invested in govt bonds from a diversified no.of developed nations with low credit risk.

Rating 3
Non-Malaysian bonds mainly focusing in Asian region or Emerging markets.

Rating 4
Non-Malaysian bond funds invested in sub investment grade corporate bonds. Also known as equity exposed bonds.

Rating 5
Balanced funds (mixture of equity and fixed income instruments), a larger percentage of bond holdings would mean lower risk level.

Rating 6
Balanced funds (mixture of equity and fixed income instruments), a larger percentage of equity holdings would mean higher risk level.

Rating 7
Globally diversified equity funds. This means it has exposure across several major regions E.g. Americas, Europe, Asia and Japan.

Rating 8
Equity funds focusing in a major region e.g. Asia Pacific ex Japan. Malaysian equities/local funds/MREITs (although they are single-country focused) as investors are not exposed towards exchange rate changes.

Rating 9
Equity funds invested in riskier emerging markets e.g. Latin America, Russia and etc with foreign exchange risk. Equities that are heavily specialized in certain sector e.g. Technology (where companies usually fails if they are slow to adapt). Non-Malaysian REITs. Real estate/Property.

Rating 10 (Highest Risk)
Commodities for their fair value is very hard to evaluate. Forex. Alternative investments like collectibles E.g. Lego (because I have to hold them physically, store them properly for years), further more not all sets can be profitable.

**I might introduce new asset classes in future, my goal is NOT to move existing ones**

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