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Risk - How to manage it PROPERLY

Peter Katevatis - Oct 23, 2014
Risk is one of my favourite topics.  I delve into it deeply with clients since it is paramount for investment comfort and success.  If you don’t take enough risk your returns are low, and if you take on too much risk the results can be disastrous dur

Risk is one of my favourite topics.  I delve into it deeply with clients since it is paramount for investment comfort and success.  If you don’t take enough risk your returns are low, and if you take on too much risk the results can be disastrous during turbulent times.

 

Finding your risk tolerance is more of an art form than a science.  You cannot simply say, “Male, single, age 42, large income equals HIGH risk tolerance”.  It doesn’t work that way.  I have clients who are age 75 and self made millionaires that find safe investments too boring.  They fully comprehend the risks they face and are eager to take them.  I have clients in their early 30s who have some wealth and a long runway of income earning potential in front of them but the thought of their portfolio dropping more than 10% at any one time is heart-stopping.

 

Risk tolerance is a personal thing and you need to be honest with yourself to truly find out what your tolerance is.  Once you have discovered your individual risk tolerance level, then you can invest in a suitable fashion.

 

Suitability is one of the financial industry’s favourite buzzwords, but it simply means matching the investment needs and risk tolerance of the individual with the appropriate investments.  When this is done properly, investors are happy.  They are happy with their performance during bull markets and content with their performance during the down periods.  When people hold unsuitable investments they can’t sleep at night and become miserable even if their returns are positive.

 

How risk is managed is changing.  When I took Finance & Economics at Western University I read in books (yes, it was THAT long ago) that by diversifying among asset classes and geographies you would balance out risk.  However, as 2008 taught us, this does not work when almost all asset classes and geographies go down and correlation rises.  Here is some nitty gritty if you’re interested.

 

Here are two different ways to manage risk:

Average Vs Capped Risk

 

Both of these portfolios have a risk tolerance of 9%.  Using the “old school” measure of Average Risk gives a very different volatility profile than Capped Risk.  Canaccord has developed some very interesting proprietary ways to manage this risk.  No matter what your risk tolerance is, how we manage it together is key.  Please let me know if you would like to discuss this further.