Risk Management

Risk Management

In modern, professional investment management, the most important thing to decide is how much risk to take with your money. When we look at the probability of different portfolios meeting your goals, as described under ‘Our Process’, the question we are really asking is: how much risk do you need to take in order to have a good chance of meeting the objectives?

However, the amount of risk you need to take is not the whole story: to build up your overall ‘risk profile’, two further elements are required. The first is your capacity to take risk. That depends upon the degree to which your life and plans would be disrupted by a large fall in the markets – if a big fall would have a big impact on you, then you have less capacity to take risks. The second is your psychological tolerance for risk. It is considered best practice to look at this last element because it is well known that human beings – both private clients and investment managers – make bad decisions when they are under stress. The idea is to keep any declines in the value of your portfolio within tolerable limits.

Risk Diagram

We assess both your capacity to take risk and your psychological tolerance for risk in a systematic way. To assess your risk capacity, we simply see how the probability of meeting your core objectives would change if your portfolio had a large fall. We assess psychological tolerance for risk using a standard questionnaire developed by psychological researchers. The three elements of your risk profile – the need to take risk, capacity to take risk and psychological tolerance for risk – together determine our final portfolio recommendation.