Auto Risks Management System
The Importance of Managing Risk
Investors always face uncertainties when investing in the capital market. Unexpected market price fluctuation could occur at any time. Furthermore, both external and internal economic shock may affect the capital market price movement significantly. In addition, investor sentiment could also influence the price movement.
The capital market price volatility is an inevitable risk that most investor must encounter. If it’s not managed properly, an investment loss is likely to be the result. If the investment value declines in the short term while the need for cash is still on the long run, there is still plenty of time to recover the asset value. However, when the need for cash comes at the time of financial crisis, managing the risks will become complicated as failure will cause loss at the end of investment.
Another problematic issue arises as investor faces many limitations. One of them is human emotion. Investors tend to buy as the market price rising to its historical high. In this case, the emotion encourages investors to invest due to their misguided perception of a potential gain. Emotion is also one of the reasons why investors exit the market when the price is already decreasing significantly. They fear that price will keep decreasing even more. Even after these wrong decisions, the experience of losing money will keep the investors away from the market for quite sometimes. When they decide to get back in the investing, the price has already been on a noticeable higher level.
Other example is when the investor is encountering an increasing price value from investment asset that his/her has. As the investor becomes greedy, he/she will postpone his profit realization (selling his asset). Without being realized, then, the price suddenly moves downward and he/she is too late to gain profit. Clearly, fear and greed drive investors to make a premature decision or the otherwise a late decision.
Another limitations faced by the investors is the limited time and access to monitor the price movement in capital market.
Therefore, a system is needed to help investors in managing risks. This system must be able to monitor price movement, to work automatically and is not being affected by human emotions.
ARMS is the answer
To meet the investor’s need in managing risk investment, Generali Indonesia has invented a risk management system that works automatically. This system is called Automatic Risks Management System (ARMS). ARMS combines several risks management method that runs automatically. This method comprised of:
This feature is functioned to keep the investment portfolio asset composition in line with the investor’s risk profile automatically and consistently from time to time. This is conducted by selling or buying each asset in a Portfolio when each proportion changes outside the predetermined composition set by the investor.
The interesting part from Auto Balancing is that investors will consistently buy certain asset when its price is low and sell it when its price is high. This is done by selling the outperforming asset and buying the underperforming asset simultaneously when the portfolio composition change outside the limit set by investor or in the other word, Buy Low-Sell High Principle occurs consistently. This is done by selling the outperforming asset and buying the underperforming asset simultaneously when the portfolio composition change outside the limit set by investor.
With Auto Balancing, the movement of price of each investment asset will be monitored daily. Also, the process as mentioned will be enforced according to investor’s tolerance limit consistently and continuously.
This feature is functioned to automatically monitor and maintain the investment portfolio performance to be accordingly and consistently with the investor’s investment goal from time to time. After achieving the growth target, investors should realize their profit (profit taking). On the contrary, when the investment declines exceeding a tolerable limit, investors need to exit the market to prevent further loss (cut loss). With Auto Trading, profit taking or cut loss works automatically.
Forthcoming development of Auto Trading: Profit Climbing
Profit Climbing is a feature developed as an alternative to Profit Taking. This feature helps investor to avoid making premature profit realization while the market could grow higher. This concept can be as an analogy of a person climbing upon a stairway in which each stairs has its safety net under it. This person will have no worries of falling down when stepping up. When this person falls from any stair, a safety net is already there to keep him/her safe from hitting the ground floor.
It is one feature that is embedded in Auto-Trading that functioned to re-invest automatically all investment result that has been realized or secured according to risk profile and investment goal of the investor.
After Existing the market, due to profit taking or cut loss, an investor must determine the time when he/she will re-enter the market. The best timing to do this is when the price of his previously owned investment instrument is cheaper. This is done by monitoring its’ price movement after the investor is out of the market. Once the price decreases to a predetermined level, the investor should re-invest in to the market. With Auto Re-Entry, this investment process works automatically.
Bounce Back is a feature of investment in facilities that serve to reallocate investment value has been realized and / or secured automatically via the Auto Trading, on the allocation of investment fund type specified by the customer, in a certain period and the parameters are determined by Generali Indonesia.
Bounce Back feature the functions similar to the Auto Re-Entry feature, the difference lies in the value of investment allocation parameters, where the Auto Re-Entry using the parameters specified by the customer, while Bounce Back uses certain parameters specified by the Generali Indonesia Investment Professionals Team and recommendations based on the investment professionals research team. In this case, when this parameter produces a signal indicating that market price has entered a trend of increasing investment, the investment fund will be re-allocated according to the composition before Auto Trading triggered.