Portfolio risk management is the process of identifying, measuring and managing the sources of uncertainty that affect the performance of a portfolio of assets. It is essential for investors who want to achieve their financial goals and avoid unnecessary losses. Lets explore the building blocks of portfolio risk management and how they can help you optimize your portfolio.
The first building block is risk assessment. This involves analyzing the historical and expected returns and volatility of each asset in your portfolio, as well as their correlations with each other and with the market. Risk assessment helps you understand how much risk you are taking and how diversified your portfolio is. For Robinswood clients, this is achieved by utilizing a “Whole Market” concept rather than a “Hole Market” idea. It’s really a matter of academics versus profit chasing.
The second building block is risk budgeting. This involves allocating a certain amount of risk to each asset or asset class in your portfolio, based on your risk tolerance, return objectives and investment horizon. Risk budgeting helps you balance your portfolio between riskier and safer assets, and between different sources of risk. Often this is seen as percentage of equity to fixed income asset classes.
The third building block is risk monitoring. This involves tracking the performance and risk characteristics of your portfolio over time and comparing them with your expectations and benchmarks. Risk monitoring helps you identify any deviations or anomalies in your portfolio, and adjust your strategy accordingly in the form of rebalancing.
The fourth building block is risk reporting. Your relationship with your financial advisor is essential in this building block. Its imperative that you trust and understand the strategy being utilized and have an awareness of the work being done on your behave. Our portfolios at Robinswood can have over 30,000 different stocks and bonds represented, risk is mitigated but still exists.
These are the building blocks of portfolio risk management that can help you create and maintain a robust and efficient portfolio. By applying these principles, you can enhance your returns, reduce your losses and achieve your financial goals.