Investment Risk Profiling

For a family office investment office, the foundational task is to clearly define the family's investment objectives and risk tolerance. This critical analysis lays the groundwork for all subsequent portfolio decisions. Determining Investment Objectives - Align objectives with the family's overarching goals and values - Considerations may include capital preservation, growth, income, impact investing, etc. - Establish clear, measurable targets for portfolio performance Assessing Risk Tolerance - Evaluate the family's willingness and ability to withstand portfolio volatility - Consider factors like time horizon, liquidity needs, and the family's risk profile - Develop a risk management framework to mitigate undesirable outcomes Analyzing Investment Outcomes - Model the impact of different investment strategies on the family's finances - Stress test portfolios against potential market conditions and scenarios - Understand how investment results may affect the family's operations Documenting the Investment Policy Statement - Codify the family's objectives, risk parameters, and decision-making processes - Use this as a guiding framework for all investment activities By thoughtfully defining the investment objectives and risk tolerance upfront, the family office investment team can construct a portfolio aligned with the family's unique circumstances and long-term goals.

How much risk you take with your investments is one of the most reliable determinants of your expected investment returns. But how much risk should you take? And what even is risk? Risk in this context is typically framed as volatility, or the chance of an investment declining in value. I'll revisit this definition later. Assessing how much risk (volatility/downside) you should take has three main dimensions: 1. Behavioral loss tolerance 2. Ability to take risk 3. Need to take risk Behavioral loss tolerance breaks down into six elements: 1. Risk tolerance: your willingness to engage in financial behavior with an uncertain outcome and the potential for loss. 2. Risk preference: your general preference to take more or less risk. 3. Financial knowledge: greater financial knowledge is associated with a higher behavioral loss tolerance. 4. Investing experience: investment experience is generally associated with being more comfortable with risk. 5. Risk perception: your subjective assessment of the risk of investing, separate from the objective reality of it. 6. Risk composure: your actual behavior during past difficult market conditions. The only way to know your risk composure is to have lived through market crashes and the accompanying narratives that exacerbate investor worries. Best practice for establishing risk tolerance is using a psychometric assessment like the Grable-Lytton assessment. https://lnkd.in/eE96zUNF The other constraint on asset allocation is your ability to take risk. Ability to take risk breaks down into 3 elements: 1. The time horizon for the goal. 2. The ongoing need for liquidity from the portfolio. 3. The capacity to absorb a financial loss. Longer time horizon, lower liquidity needs, and higher risk capacity imply higher risk ability. The last dimension is the need to take risk. Someone with high loss tolerance and risk ability may not need to take a lot of risk, while someone with a low loss tolerance and risk ability who needs to take a lot of risk may need to reconsider their goals. Risk profiling frames risk as volatility, but that’s not the only relevant measure of risk for for long-term investors. Stocks are more volatile than nominal bonds, but they have been historically much less likely to lose purchasing power at long horizons. Long-term investors concerned with their inflation-adjusted wealth and spending may find that a higher allocation to stocks is, contrary to popular wisdom, safer than a more bond-heavy portfolio. Your psychological constitution and your financial situation are constraints on how much risk you can take. Even if you can handle taking a lot of risk, you may not want to if you don’t need to take much to meet your goals. Finally, and importantly, the nature of risk (volatility vs. funding long-term real consumption) changes with time horizon.

Investing Part 5 My Word Today is #Risk Today, we continue our series on investing by taking a closer look at Risk Appetite. After assessing your financial position, determining your investment objectives, and horizon, the next phase is to assess your risk appetite. Risk is a measure of uncertainty of outcome of your investment, ie the probability of not meeting your expected return or even losing some or all of your invested sum. Do note however that risk is not a bad word. The return you earn is your reward for the risk taken. Simply put, without risk, there can be no return. Nonetheless, you must properly appraise your Risk Appetite, which is your tolerance level to investment risk in other words, the level of uncertainty or potential loss you’re willing to accept in pursuit of your investment goals. Its how much risk you can handle without compromising your peace of mind. Usually, this will also indicate what you should or should not invest in in terms of Asset Classes Instrument Types Investment Tenors Sectors How to Measure Your Risk Appetite:- There are three broad Risk Profiles or Risk Tolerance categories :- 👉 Low Risk Appetite - You are very cautious with money, require guarantees of principal protection and even of return expectations. You would rather earn little or no return that put your principal at risk. 👉 Medium Risk Appetite - You are cautiously optimistic and calculating in your investment moves. You require relatively safe investments with principal protection, even if return outcomes may vary. 👉 High Risk Appetite - You are more adventurous and desire spectacular returns. In exchange for this possibility, you can accept market volatility (frequent price fluctuations). Factors Influencing Your Risk Profile Quite often, Risk Tolerance is impacted by factors such as:- - Age - Risk appetite reduces with increase in age. - Past Experiences - Prior experiences with money, including childhood ones may shape our attitude to financial risk - Career stage - Risk appetite reduces as workers draw closer to retirement and income assurance reduces. - Personality Traits - Natural traits like general optimism or the reverse also impact our attitude to investment risk. At Emerging Africa, we recognize that everyone’s risk profile is unique. That’s why we provide tailored guidance to help you invest confidently, whether you’re a cautious saver or an aggressive growth seeker. Would you like to assess your risk appetite ? Advisers at Emerging Africa Group can guide you through questions that will help you to assess this before you start investing. #wordfortoday #tfswisdomtips #gamechanger #investing #investmentprocess #RiskAppetite In pic Emerging Africa Group offices in Ikoyi, Lagos.

Did you know that an investor’s risk profile is usually dynamic and changes over a period of time. There are 2 major factors that contribute to this. 1. Portfolio size - as this increases the volatility becomes more difficult to stomach. A 20% fall on 5L is notional 1L loss. But 20% on 1 Cr is 20L and the investor might lose sleep. 2. Goal duration - as financial goals approach, risk profile becomes conservative. As investor can’t afford last minute market falls that delays the goal. In both cases, equity % in portfolio can be gradually reduced to factor the change in risk profile. It is important for advisors to monitor the possible risk profile change constantly during portfolio reviews. In some cases investors come forward and showcase discomfort but in most cases, they might not reveal their discomfort directly. Waiting for an actual correction to realise this means the advisor is likely to lose the client. Onus is on the advisor to pick up the hints and ask subtle questions to understand better and proactively recommend changes.