Risk exposure and risk appetite are phrases you’ll often hear in a wealth management context, and they’re crucial to understand. Many people want a balanced portfolio. Essentially, that means your riskier exposure, with the associated more attractive returns, is mitigated by lower-risk products.
Even if minimal risk, every investment carries a proportion of exposure; it’s a fundamental part of risk-return, not something we can ever truly eradicate. What we can do however, is control how exposed your portfolio is with careful calculations to identify the potential pitfalls of any investment product.
A risk assessment might include:
Those tasks might appear similar for any portfolio, the outcomes won’t be.
A risk assessment isn’t only an exercise to quantify the potential that a product will fail, but also to align your risk to your ambitions. If you were looking for dynamic investment options with a high-expected return in a short timescale, the suitable options would be more volatile.
A long-term investment strategy to grow your wealth for retirement should adopt a more cautious stance.
With that in mind, risk assessments are important since they highlight how well your current investment products match your expectations and whether there are better performing options out there.
Just as the resulting actions from a risk assessment will differ for each portfolio, several techniques are used to evaluate the risk involved in an investment.
Value at Risk (VaR).
Conditional Value at Risk (CVaR).
While your financial adviser manages the intricate analysis processes, it’s helpful to know how they calculate the probability of a loss and how accurate those statistical methods are.
Standard deviation looks at the performance of an investment product and how far returns stray from expected values.
We can examine the annual return rates and how current returns deviate from historical norms. An investment with highly volatile deviations is riskier.
A beta measurement estimates systematic risk – those are exposures related to the market or sector. Political uncertainty is a systematic risk that will likely affect many currency markets.
The market is measured as one beta, gauged against the security beta – if that beta is also one, it moves in line with the market. A beta of over one indicates higher instability, and less than one the opposite.
The benefit of beta evaluations is that it’s relatively simple to diversify your portfolio if an unacceptable risk is identified.
You’re likely familiar with financial documentation advising that ‘value is at risk’, which means your invested funds have an exposure element associated with the company or portfolio.
VaR measures the worst-case scenario loss over a defined period. The goal is to judge the.
percentage chance that the portfolio will lose a specific value over the time considered.
CVaR is slightly different in that it considers the tail risk.
That means the likelihood that something will happen, in extension to the VaR calculation, after the investment has reached the maximum threshold for loss.
These techniques are just some of the many ways a financial adviser should evaluate your portfolio and arrive at professional recommendations that help you maximise returns, but in line with your accepted risk exposure appetite.
Approaching any wealth management strategy with an eye solely on potential returns is a recipe for disaster. While risk and rewards aren’t the only indicators of a quality investment, they are essential components to creating a future-proof wealth management strategy.
If you want to appraise your risk exposure, the first step is to work out what you consider acceptable.
At Lawsons Equity, our approach always starts with a thorough consultation process to help us understand what you want from your wealth and how well your investment performance links to your plans.
When do you want to tap into your assets? The right wealth management strategy for a 10-year timetable will differ from one with a two-year crystallisation goal.
Do you have any inherited assets you want to hold onto, regardless of the quantified risk? Are there specific markets or sustainable sectors you would like to see incorporated into your portfolio?
What range of assets do you have, and how dependent are you on the income generated to fund a comfortable retirement? When do you plan to retire, and in which country?
Do you hold insurance products to guard against loss of income, ill health, bereavement or other unforeseen circumstances?
How many dependents do you want to financially provide? Do you have a contingency fund or sufficient liquidity that failure of high-risk investment products wouldn’t severely impact you?
All these elements lead to creating a tailored wealth management strategy, catering to your family circumstances, income requirements and cash flow needs.
Risk tolerance can and often changes over time, so a risk assessment isn’t a one-off or something that will continually fit the same risk exposure profile. Having an experienced financial adviser, offering regular portfolio performance reports, reviews and appraisals, is key to ensure your investments work for you and remain beneficial.
As a privately owned firm with no ties to any products or providers, accredited and regulated to the highest standards, Lawsons Equity provides tailored, transparent advice for expats. For more information about evaluating your current risk exposure or creating a comprehensive risk profile, please contact us to schedule a private consultation with one of our experts.
Lawsons Equity – Financial Advisors Malta
Lawsons Equity Limited is a company registered in Malta with company number C49564 and licensed by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994.
Lawsons Equity Ltd have passported their services across the EU. To see a full list of countries click here.
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Lawsons Equity Limited is a company registered in Malta with company number C49564 and Licenced by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994. Lawsons Equity Ltd have passported their services across the EU. To see a full list of countries click here
In the United Kingdom, Lawsons Equity Limited is deemed authorised and regulated by the Financial Conduct Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.
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