How is portfolio risk measured in investment management?

Before making any decisions about which investment strategies you wish to invest into, understanding your attitude and risk bears most importance as the value of these investments can fall as well as rise.

Different people have different attitudes towards risk and it is important you understand what your level is so that we select the right portfolio to suit you.

Your risk profile is an essential part of the process

Risk is a huge subject, it comes in many forms, and is something that we all have a view on.

For some it means danger, discomfort and should be avoided at all costs, for others, it is an opportunity.

At The Private Office (TPO), establishing your attitude to risk and the level of risk that is appropriate for your circumstances is an essential part of our process.

The risk you take is linked to your investment objectives, and we will assess the level of risk that should be taken to achieve your objectives for any investments that we manage for you.

In the context of investing, some specific risks which might be experienced are: 

  • Inflation 
  • Currency exchange rates 
  • Politics 
  • Legislation and regulation 
  • Liquidity or accessibility risk 
  • Concentration risk 
  • Market volatility 
  • Interest rates 
  • Rates of return and fluctuations 

Building a portfolio around risk

Some of these can be controlled or mitigated, others cannot. Our role is to build an investment portfolio with greater or lesser degrees of risk, in accordance with your objectives, tolerance, capacity for loss and overall view on risk. The six key components of risk profiling are as follows:

What is risk tolerance in investing?

What are your instinctive thoughts and feelings about risk, and what would keep you awake at night?

This is almost completely subjective, and to help both clients and advisers understand and challenge these views, we will often use a risk tolerance profiling tool, or questionnaire to aid our discussions.

Need or desire to take risks

This is the importance of a good discussion and good planning. Not everyone needs to take risks to achieve their objectives, but some may still choose to.

Some risks may be quantifiable where a specific rate of return is required, others will be more aspirational.

Your capacity for loss

This is your financial ability to withstand investment losses without impacting your standard of living, otherwise known as affordability.

We will look at the asset base and income stream you have and determine your capacity to accept investment risk in the context of your overall financial plan.

Objectives

It is not unusual for clients to have a number of different financial objectives and differing attitudes to risk depending on what they are trying to achieve, and some may even be quantifiable such as building a fund for a house purchase or university fees.

Time

How long can the money be invested?

Generally, the longer the better, particularly where you are looking to grow your capital.

Investing indefinitely, or for 10 years plus, potentially offers more ability to withstand market volatility, accept higher risks and an opportunity to exit strategically.

Where investments are for a shorter period, or with a defined term for when the funds are required, a different approach to investing will be needed.

Knowledge and experience 

Your knowledge and experience of financial services, products and transactions, how previous experiences have made you feel, and what drove you to make the investment choices and decisions you have made in the past?

If you would like help investing your wealth get in touch and arrange a free consultation with a Financial Adviser.

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