Investing can give you great results. And every result is different, as every goal is different. Think about a solid retirement, a house, or growing assets to beat inflation. But it matters to explore the risks that come along with investing. It's all about how you manage those risks. But how does risk management work? We’ll take you into that with DHF Capital S.A. CFO Ali Jaffari: “With the ongoing volatility, heightened geopolitical risk, and greater occurrence of tail-risk events, safeguarding your assets is of paramount importance.”

First things First: Understanding the Concept of Risks

Risks are a natural accompaniment to investing. For you as an investor, they always poke at the edge of your thoughts. “What if…”, “When shall I”, “Would there be…”. Financial independence can free you from worries about money. Risk management in investing can liberate you from worries about risk. But first, we have to understand the definition of risks and when they occur. Investment risks can come in various forms, each with its level of unpredictability and impact.

The most common risk is market risk. That’s the risk of investments declining in value due to economic developments, market sentiment, or external events. This risk is often out of your control. Credit Risk is the risk that a borrower, in the case of bonds or loans, will default on their repayment obligations.

When it comes to your ability to buy or sell an investment quickly without affecting its price, you talk about liquidity risk. Less liquid assets might be harder to exit without substantial losses. When you have a significant portion of your investments in a single asset, sector, or geographical area we speak of concentration risk. Diversification can help mitigate this.

“A common misconception is that deploying risk management strategies comes at a significant cost,” Jaffari explains. “Or that tail-risk events will occur anyways, and risk management will not protect against it.”

Diversification and Risk Management Strategies

Diversification is a fundamental concept in risk management. It involves spreading your investments across a range of assets. Roughly, you can do that in three ways. With asset allocation, you carefully consider how you distribute your investments among different asset classes like stocks, bonds, real estate, and commodities. Each asset class carries different levels of risk, and the goal is to create a portfolio that matches your risk tolerance and financial goals.

Jaffari: “Many investors still stick to the 40 / 60 rule of investing with 40% of assets allocated to fixed-income securities and 60% to equities. As seen under the rising rate environment, fixed income underperformed, which heavily impacted certain investor portfolios. By actively rebalancing and adjusting portfolio allocations to certain macro events, using derivatives to hedge against rising rates, and reducing bond duration on their portfolio, investors were able to manage their over-portfolio risk.”

Knowing your risk tolerance is crucial and another way of diversification. It's like understanding your own threshold for turbulence before boarding an airplane. Are you comfortable with some fluctuations, or are you seeking a smoother ride? Your risk tolerance guides your asset allocation.

With the third strategy called dollar-cost averaging, you invest a fixed amount at regular intervals, regardless of market conditions. It minimizes the impact of market volatility on your portfolio and allows you to accumulate more units when prices are low.

Creating a Risk Management Plan: our Starter Guide

Jaffari can’t express more how important it is to work out your strategy to a solid risk management plan: “Many factors come into consideration and investors need to construct an Investment Policy Statement. In that, you include your risk tolerance, return objectives, cashflow requirements, ongoing expenditures, and a thorough understanding of what the asset classes offer from a risk-adjusted returns perspective.”

Having a risk management plan is like having a compass in a dense forest; it keeps you on the right path. You measure your risk tolerance by identifying your objectives through a risk assessment. A risk assessment is a structured process of identifying and evaluating potential risks, determining their significance, and developing strategies to mitigate them. This involves identifying, prioritizing, and addressing risks systematically to protect an organization or project from adverse events. Regular monitoring and communication with stakeholders like your financial advisors are crucial to maintaining an effective risk assessment process.

Can DHF Capital S.A. aid in this? Yes. “As part of our client-centric approach, we make our clients aware of the risks associated with each investment and advise on strategies that fit in with their risk tolerance profile,” Jaffari explains. “We understand that each investor is unique and bears a different investment and risk tolerance profile. Our goal is to listen to you and offer products that fit within your investment profile and satisfy requirements from cashflow distribution, capital preservation, risk, and returns perspective.”

Customized products that have a varying degree of risk and reward characteristics take us to the understanding of every investor’s uniqueness. From cashflow distribution to capital preservation, from risk perspective to returns perspective. “Core risk management is at the forefront of our strategy. We maintain a well-diversified portfolio and pick asset classes that have a low correlation with each other and the market. Our primary goal is the preservation of capital and we leverage AI-powered tools to track, take positions, and limit the fund’s sensitivity to market risk.”

Monitoring and Rebalancing

Your journey in risk management doesn't end when you create a plan. It's an ongoing process that requires vigilance and adaptability. Therefore, Jaffari urges you to always revisit your portfolio allocation targets and see if it is relevant to the current environment. “Ask yourself if you are protected from a tail-risk event. My advice? Ensure you have a well-diversified portfolio to protect against ongoing volatility. Consider using risk mitigation strategies and hedging products such as derivatives to limit potential losses in your portfolio. Periodically review your investment portfolio and make adjustments as necessary.”

If your portfolio drifts from your desired asset allocation due to market movements, it's time to rebalance. This involves selling or buying assets to bring your portfolio back to its original allocation. What happens if an unforeseen event occurs? Having an investment emergency plan in place, such as an emergency fund or exit strategies, can help you weather unexpected financial storms.

The future of risk management with DHF Capital S.A.

“The future of risk management is evolving,” Jaffari reassures us. “With AI tools asset managers are becoming more sophisticated in how they identify, quantify, and manage your risk. At DHF Capital, the preservation of capital by operating a robust risk management framework is centric to our organization. We continue to invest in our risk management processes and leverage technology to ensure we stay on top of market trends while mitigating risk for you as our client.”

Trust and a solid risk management plan are the cornerstone of success. You don’t have to figure this out by yourself. What about a seasoned expert at your side? Your financial goals are our priority. Let's embark on this journey together. Don't hesitate to contact us for personalized guidance. We believe in making the complex world of finance simple and transparent for you.