IskraIndex stress-test: Are Deposit+ portfolios suitable for short-term investors?
IskraIndex often receives questions of this nature: if we consider your portfolios as an alternative to a deposit, what is the probability of performing worse or falling into loss territory on a horizon of up to 1 year? Investment products are typically recommended for people with an investment horizon of more than a year, but what if their horizon is shorter yet their risk appetite is quite high?
To answer this question, we took the available performance history of the conservative Deposit+ portfolio over 6 years and 9 months, and analyzed all its 3‑month, 6‑month, and 9‑month intervals. In this way, we abstract away from any specific entry point into our portfolios, and from a probabilistic model perspective, we look at the risk an investor faces of entering the IskraIndex portfolios at an "unfortunate" time.
3‑month intervals
Out of 1,676 historical three‑month intervals, 18% performed worse than a one‑year deposit, and about 12% were in the red. Thus, by investing for three months, an investor would have outperformed the deposit rate in 82% of cases, choosing the investment moment arbitrarily since August 2019.
As for achieving the target return, the probability of doing that over short intervals was 45%.
The figure below shows the distribution of returns across intervals, as well as the area with negative returns.
6‑month intervals
Out of 1,617 six‑month intervals, 17% performed worse than a one‑year deposit, and about 10% were in the red. Thus, by choosing the investment moment arbitrarily since August 2019, an investor would have outperformed the deposit rate in 83% of cases.
The target return would have been achieved with a 51% probability.
9‑month intervals
Out of 1,553 nine‑month intervals, 15% performed worse than a one‑year deposit, and about 8% were in the red. Thus, an investor would have outperformed the deposit rate in 85% of cases, choosing the investment moment for a year arbitrarily since August 2019.
The target return would have been achieved with a 65% probability.
Minimum recommended investment horizon to achieve target return
Matching the deposit rate is a stress scenario, while the main goal of the IskraIndex portfolios is to significantly outperform it. Based on the distributions above, it is evident that the probability of achieving the target return increases sharply as the investment horizon lengthens. For 3‑month and 6‑month intervals it stands at 45% and 51%, respectively, while for 9‑month intervals it reaches 65%. Given that in a classical Gaussian distribution the expected value corresponds to a 50% probability, this indicates that the return distributions of the Deposit+ IskraIndex portfolios over short intervals are asymmetric, and their peak shifts to the right as the investment horizon increases. Considering that for 9‑month intervals the probability of achieving the target return is substantially above 50%, while the probability of falling short of the deposit rate is only 15%, a 9‑month investment horizon can be considered the minimum recommended for the IskraIndex portfolios. This is an interesting feature that significantly distinguishes them from traditional investment products — you will not find a single investment product that offers a probability of achieving the target return (which the investor is "buying") of more than 50% (as a matter of principle). All the more so if we are talking about a horizon of less than a year, and, moreover, as the investment horizon increases, the probability of losses in IskraIndex portfolios will approach zero, and the probability of achieving the target return will approach 100%.
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