ASK THE EXPERTS

CLOSE BROTHER’S CHRISTOPHER GODFREY-FAUSSETT JOINS US TO ANSWER A QUESTION ABOUT INVESTMENT

HOW CAN YOU QUANTIFY AND MANAGE INVESTMENT RISK?

ANSWER: Whether you consider yourself to be a conservative or adventurous investor, it’s important to truly understand your risk tolerance and what this can mean for your investments. Christopher Godfrey-Faussett, Managing Director at Close Brothers Asset Management, explains the three main types of risk: investor risk, portfolio risk and stock risk.

Investor risk refers to your expectations. It includes your time horizon, objectives, understanding of market dynamics, and plans for the future (this could be upcoming projects, living expenses or income requirements). We consider time horizon to be the most important of these factors. At Close Brothers, we believe the best results are achieved by focusing on the long term.

To manage portfolio risk, ensure that you are sufficiently diversified to weather all market conditions. Your risk tolerance will help determine the optimal mix of asset classes to invest in – be it bonds, commodities, property or other alternatives asset classes that do not tend to correlate with stock markets, so that if markets fall, your entire portfolio does not consequently follow. You are also likely to want to have some cash on hand – both as a defensive measure and so you have the ability to invest in new opportunities that arise.

To manage stock risk, make sure that each company you invest in has the management expertise, sound cash generation and a strong balance sheet to deliver returns. We have a robust research team that works alongside our investment managers to uncover these types of opportunities. The idea is to take advantage of compelling investment themes – strongly-performing pharmaceutical or technology stocks, for example.

Finally, make sure your investments continually match your risk tolerance. We have an in-house risk monitoring system, which we use on a daily basis. This gives us information on expected volatility too and flags anything that falls out of line with our clients’ risk profiles. If you’re concerned about the risk or performance of your portfolio during this time, it may be worth getting in touch with an investment professional.

Your capital is at risk. Investments can go down as well as up due to more lacklustre performance from equities.