Advisors act as risk managers

Our Role in Managing Risk

The exogenous event of COVID-19 has been an uncomfortable reminder that we are all vulnerable to unforeseen risks that can have unprecedented effects. As investors, we could try and avoid these terrible events, but for most of us, overly defensive tactics, such as not participating in the markets, wouldn’t help in achieving our goals over the longer term.

As the saying goes, perhaps “the correct lesson to learn from surprises is that the world is surprising.” Equity markets inherently come with risks — in order to reap the potential returns offered by the markets, investors must be willing to accept that surprises can happen from time to time.

Risks in investing can never be eliminated, but they can be managed.

This is one of our main roles — to act as risk managers. As risk managers, we have significant concern and care about preserving your capital and growing it over the longer-term. We put this into practice when we construct and manage portfolios — positioning them so they don’t do terribly in any one particular outcome, but also have the chance to do well across the many potential paths the markets could take.

During buoyant market periods, such as the extended bull market run we recently experienced, the need for risk management may not be overly apparent. It may have been easy to get caught up in the prevailing momentum and continuous market advances. Yet, risk management does not focus on achieving the highest possible rates of return — it is about preserving hard-earned capital to support investors in achieving the returns needed to accomplish their goals.

Often, it’s only when prices head downwards that the value of risk management becomes more obvious. This means following various guidelines that have been established to control risk. We do this in various ways, such as:

  • maintaining a strategic asset allocation
  • rebalancing portfolios back to target allocations when they drift too far
  • limiting the size of any particular holding
  • diversifying exposure across sectors and geographies; and
  • paying particular attention to an investor’s personal risk tolerance levels

We’re also here to provide counsel.

As hard and fast as equity markets fell in late February, the rebound in April was equally stunning. As award-winning finance columnist, Morgan Housel, has said: “You will likely be more fearful when your investments are crashing and more greedy when they’re surging than you anticipate. And most of us won’t believe it until it happens.”

Sometimes emotions can pose risks to our short-term decision-making that can affect our longer-term well being.

While everyone has an idea about how things will continue to unfold, in reality, nobody can be certain about the near-term path forward. Risk management practices are intended to help protect investors from the potential changes.

During these challenging times, investing requires patience to understand that the markets will inevitably encounter surprises along the way. Investors also need to keep in mind through market swings that portfolio guidelines have been put in place to support your journey to investment success.

Please call if you would like to discuss.