A different look at risk within your investment portfolio.
Thought leadership
Risk management beyond investments: 5 ways to evaluate risk
As stewards of our investment portfolio assets, it is our responsibility to ensure we're meeting our fiduciary duties and understanding how much risk we take on in search of higher return. That’s why it’s critical to include a portfolio risk analysis as part of your going strategy and governance process. This type of exercise should have prepared you for the sudden market decline earlier this year. Knowing your risk tolerance allows you to quantify that the free fall was within the realm of your portfolio’s return distribution.
While we traditionally use the risk management process to evaluate stats like the standard deviation and Sharpe ratio within a specific investment portfolio, we encourage you to consider the big picture and an overall governance system that works towards achieving your mission. After all, the greatest risk is that of not meeting your long-term strategic objectives and fulfilling the mission.
Here are five other ways to look at your portfolio’s risk:
There’s no crystal ball for our future. But conducting a thorough analysis, from both the short term and long term view, is critical in understanding the various risks you have embedded in your asset allocation. Having a sense of what the possible results are will not only help to relieve anxiety as we continue on this market rollercoaster, but also will help satisfy your fiduciary responsibilities to the beneficiaries of these assets. The best we can do is constructively and comprehensively examine the data and apply some qualitative reasoning to give us a sense of the direction we need to take to move forward.
Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. There can be no assurance that your investment objectives will be achieved nor that risk can be managed successfully.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.
Standard deviation is a statistical measurement in finance that, when applied to the annual rate of return of an investment, sheds light on that investment's historical volatility. Sharpe ratio describes how much excess return you receive for the extra volatility you endure for holding a riskier asset.