Eugene Botha, Deputy CIO at Momentum Investments
Risk management, capital protection and “certainty around what will happen to my capital” has become buzz phrases given the impact that the pandemic had on financial markets. After an extended period of positive market returns prior to the pandemic and then experiencing the pandemic and the volatility that investment markets can bring, investors are increasingly highlighting what risk means to them – either through voicing it verbally or through their decisions on what they do with their capital and investments.
In an uncertain world, it is key to plan and sculpt that ‘optimal’ client focused investment portfolio to make sure you help them achieve their personal financial goals. The most important aspect in understanding clients’ needs and keep them invested, is to ultimately understand their risk profiles.
Clients’ goals or investment objectives cannot be formulated if the return requirements and the risk constraints are not properly understood. Most clients do not have an idea of what their risk profiles are. They typically understand and know what they would like to achieve, but hardly ever understand what it means from a risk perspective to deliver on the goal.
In the traditional sense of the word, risk in investments is measured in a mathematical sense based on a historical profile. All these risk measures have a place in investments if understood, interpreted and applied correctly. But risk is not equal for all.
For most investors with a goal in mind, risk is the probability of not delivering on the goal, the erosion of the purchasing power of their capital over time, or perhaps the loss of capital, or a combination of these. All these measures are tangible and well understood.
A client risk profile is usually defined on a behavioural basis along three different dimensions – the willingness to take risk, the ability to take risk, and the need to accept risk (see figure 1). By understanding the true client risk profile and linking that to the investment goal, a more informed investment portfolio can be designed, monitored and steered along the path to successful delivery on the objective with a high degree of certainty.
Figure 1 Vanguard: Investment risk and financial advice
Misunderstandings about what risk means are very common, and they are extremely dangerous. Risk is not just one-sided as not taking risk can be risky.
Momentum Outcome-based Solutions strive to understand the true risk profile of clients, building these risk profiles into the design and construction of the client portfolio, understanding the sensitivities to real-world unforeseen risks and monitoring and managing the risk relative to the desired outcome. This enables us to realistically deliver on our client promise, by aiming to minimize the probability of shortfall relative to the client goal.
With so many things in life out of our control, it can bring comfort to focus on things that we can control. Risk is one of the few things that can be controlled when it comes to investing and it just may be one of the most important if properly understood and defined.
Focusing on a disciplined client focused investment strategy rather than the whims of the market is a key component of helping your clients achieve their personal financial goals.
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Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.