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Now Is A Great Time To Revisit Your Risk Tolerance
Now Is A Great Time To Revisit Your Risk Tolerance

Forbes

time10 hours ago

  • Business
  • Forbes

Now Is A Great Time To Revisit Your Risk Tolerance

Despite all the mayhem in the world today, the market has remained pretty resilient, hasn't it? But even as summer is coming to a close and kids are going back to school, we're only one short season removed from a market whipsaw of historic proportions. It was just in April (of this year) that the market suffered double-digit losses in only days—then recouped most of those losses in a single day, before ultimately ascending to new highs. So, while the sting of those sharp losses may have been dulled by the rebound, my inclination is to remind you of the losses and invite you to revisit your risk tolerance and the degree to which your portfolio accurately reflects it. Why Reconsider My Risk Tolerance Regularly? Why is that important? Because risk tolerance is not a set-it-and-forget-it, one-time decision; it's a living, breathing reflection of your personal posture to the (investing) world around us. This is important in part because the markets are always moving, but even more so because we are always changing. Life isn't linear, and neither is our risk tolerance. And it's not just because your understanding of and posture toward investments specifically shifts, though it does; it's also because changes in our life and work will impact our tolerance for market risk. What Does Risk Tolerance Really Mean? We've historically tended to look at risk tolerance through too small of a lens, only considering one or two variables, when I believe we should really be considering at least three: Your time horizon, or ability to assume risk, is often used as a single guiding factor (especially in target-date funds) for risk tolerance. It simply assumes, from a statistical perspective, that the farther away the date is when you may need to utilize the money you're investing, the greater your ability to assume risk. One of the oldest risk tolerance equations was to subtract your age from 100 and use the corresponding answer as the percentage of your portfolio that should be invested in stocks, or more growth-oriented investments. Your need to take risk is also something that can be calculated numerically, estimating the rate of return required to meet your goals in the future. For example, if your goals are more aggressive, requiring a higher average rate of return, the presumption is that you need to take more risk in order to meet your goals. Whereas, if you only needed, say, 5% average annual return to meet your future goals, you could presumably take more risk. The challenge with both of these factors—the two most common in oversimplified risk tolerance short cuts—is that they are regularly ignored by the third and often most powerful (albeit least calculable) factor that gauges your gut. Our willingness to assume risk is the gut factor. It's the answer to the question, 'So just how much market volatility can you handle before you give up?' And despite the financial industry's attempts to make tangible this inherently intangible factor (often through questionnaires that foist a host of hypothetical scenarios onto an investor), I've found the best way to determine your willingness is to live through market volatility and calibrate as you go. The especially tricky part is that our willingness to assume risk is not only changed because of our direct reactions to the market itself, but it can (and often should) change due to factors well outside of our finance textbooks. Indeed, your tolerance of market risk could change over time, or even overnight, due to the birth of a child, the death of a parent, a job change, a move, a marriage, a divorce, or any other number of factors. How Can We Better Gauge Our Tolerance And Change Our Portfolios? Let's start with a different tactic that utilizes a four-bucket approach to risk and portfolio management. Because I believe risk isn't just about volatility or investment returns, I encourage clients to frame their financial lives through four interrelated lenses: Grow, Protect, Give, and Live. Each of these can influence how we think about risk and how we build portfolios that are better aligned with our lives—not just our timelines or tolerance scores. And while the precise order that we address them could be different for every client, I'm going to start by filling the two buckets that also tend to be the receptacles for some of our greatest fears in financial planning. As financial advisors, we've attempted to use various calculations to recommend amounts for someone to keep in their emergency reserves—think three-to-six-to-twelve months of living expenses—a professional lifetime of working with clients suggests that this number is almost an entirely emotional equation. That's one of the reasons that it is often such a round number: $10,000, $50,000, $100,000, even $1 million. And I'm simply not inclined to argue with your gut, so unless I think you're warehousing so much in cash that it's likely to hurt you in the future, I'm not sure we need to get any more scientific in filling the Protect bucket than by asking, 'So, how much money in the bank helps you sleep at night?' And by the way, I put 'in the bank' in quotes because there are other ways to ensure that your money is as secure as possible, but FDIC-insured savings or CDs are likely the gold standard. But please take note, because if you are investing significant amounts of cash, there are limits on how much of your savings is actually secured by the FDIC, regularly requiring us to look to other cash management tools to ensure that your emergency savings is as secure as possible. The idea here is that if you're able to fill your Live bucket with enough money for the mid-term, you're free to worry less about the market's machinations in the short term. And while this, too, is largely an emotional decision, we may be able to better inform your gut. For example, depending on the analysis and how you define 'the market,' you'll likely find that the market has a positive rate of return in about 87% of the five-year rolling periods, 94% of the rolling 10-year periods, and 100% of the 20-year periods. And while I'd never want to suggest that you build your portfolio solely based on historical figures that may not replicate themselves in the future, I do believe this is a reasonable guide for determining how much we need in the Live bucket. If you're a more conservative investor, you might opt for 10, 15, or even 20 years' worth of income in your Live bucket—and if you're more aggressive, you might opt for five or seven. And what if you're still working? Do you need to populate your Live bucket at all while you're still receiving a paycheck? This may depend on your labor capital risk—basically how volatile and secure is your household income? For example, a tenured professor has a low labor capital risk, while a mortgage broker who lives off of commission sales may have a higher labor capital risk. The higher the risk, the more you might consider putting in your Live bucket, even while you're still working. What types of investments might live in your Live bucket? While this particular post is more about strategic positioning than tactical details, it's reasonable to assume that the assets found in the Live bucket may take on slightly more risk than the Protect bucket, but definitely less than the Grow bucket. So think about more conservative fixed-income vehicles, pension, and annuity income here. Then, once the Protect and Live buckets are filled, I believe it frees investors to be even better growth investors. The market has a tendency to reward long-term investors while often confounding, or even punishing, short-term investors. But once you're freed from the worry of short- and mid-term volatility (a la the Protect and Live buckets), you may feel a sense of release to position your Grow bucket in a way that is designed to maximize your potential reward by taking more risk. This bucket is where your stocks, equity based mutual funds and ETFs, private equity, venture capital, and hedge funds would reside. I've met very few people who were inclined to label themselves as philanthropic, or even charitable. However, I know many people who are extremely generous, both to those they love and the causes that are most important to them. The Give bucket, therefore, is the receptacle (and potentially receptacles) that are the holding place for these investments. These could be 529 education savings plans or custodial accounts for your children, trusts that are outlined in your estate planning documents, donor advised funds (DAFs), or even foundations and family offices for those of more significant means. The fascinating part about how these assets are invested is that it's no longer about you and your risk tolerance—it's about the ability, willingness, and need to take risk of those for whom the assets are designated. Therefore, it may even become a collaboration to determine how best to invest your Give bucket. Conclusion So yes, the market rebounded. And yes, your portfolio may have 'recovered.' But resilience in numbers isn't the same as resilience in you. Therefore, if the last market swing made you uneasy—even briefly—it's worth examining whether your portfolio still reflects your reality. Because I believe risk tolerance isn't just a personality trait or a math problem. It's a living profile of your financial life, shaped by your goals, values, and experiences, as well as your ability, willingness, and need to assume risk. And when you construct your portfolio through the Grow, Protect, Give, Live (GPGL) model, you're not just managing investments—you're designing a life that's more intentional and aligned with what's most important to you.

Strategic Asset Allocation: Building Resilience in a Shifting Investment Landscape
Strategic Asset Allocation: Building Resilience in a Shifting Investment Landscape

Argaam

time14 hours ago

  • Business
  • Argaam

Strategic Asset Allocation: Building Resilience in a Shifting Investment Landscape

In today's unpredictable market environment, building a resilient investment portfolio is more important than ever. Economic uncertainty, inflationary pressures, rising interest rates, and geopolitical tensions have challenged traditional investment strategies. Given these challenges, one approach remains a reliable strategy: strategic asset allocation. What Is Strategic Asset Allocation? At its core, strategic asset allocation is the structured way of allocating investments across asset classes, such as equities, fixed income, and alternatives, based on an investor's long-term objectives, risk tolerance, and time horizon. Unlike tactical allocation, which responds to short-term market movements, strategic allocation is designed to remain consistent over time and provide stability across different economic cycles. This long-term approach ensures that portfolios are not overexposed to any one risk factor. Instead, it allows investors to benefit from a diversified mix of return sources, which can reduce portfolio volatility and support consistent performance. The 60/40 Portfolio: Time for a Rethink? For decades, the 60/40 portfolio, allocating 60% to public equities and 40% to bonds, was considered a balanced approach to risk and return. However, recent market cycles have exposed its limitations. In 2022, for instance, both stocks and bonds declined simultaneously, challenging the assumption that fixed income would reliably offset equity market downturns. 1 As interest rates rise from historic lows and inflation becomes more persistent, traditional fixed income may no longer provide the same defensive buffer. This has prompted a growing number of investors to revisit their allocation strategies and explore alternative sources of diversification and yield. The Case for Private Markets Private markets, comprising private equity, private credit, real estate, and infrastructure, are playing a growing role in modern asset allocation. These investments are typically less correlated with public markets and can offer more predictable returns in the long run. According to Hamilton Lane's 2024 Market Overview, consistent exposure to private markets has been shown to enhance long-term portfolio performance by capitalizing on the effects of compounding and reinvested distributions from private assets 2. Similarly, a McKinsey study found that leading institutional investors now allocate an average of 25% of their portfolios to private markets, which is a significant shift driven by the desire to reduce volatility and tap into long-term value creation. 3 Unlike daily-traded securities, private investments tend to be long-term in nature, with capital often locked for several years. This illiquidity, while sometimes perceived as a drawback, actually contributes to what is known as the "illiquidity premium"; the excess return investors may earn in exchange for giving up short-term access to their capital. Choosing the Right Partner Despite their advantages, private market opportunities are not always easily accessible. They often require significant capital, thorough due diligence, and the ability to evaluate complex structures. This is why partnering with a trusted investment advisor is crucial. An experienced wealth manager can help navigate private markets by identifying top-tier opportunities, managing risk across different sectors and geographies, and aligning investments with each client's goals and time horizon. More importantly, they offer institutional-grade discipline, applying the same standards that guide the largest global investors, to portfolios tailored for individuals and families. Final Thoughts Strategic asset allocation is not about predicting which asset will outperform next. It's about building a portfolio that can endure market uncertainty while remaining aligned with long-term financial goals. In a world where traditional models are being tested, including private markets as part of a diversified approach across a broader set of asset classes has become not only advisable, but necessary. At The Family Office, we leverage over 20 years of experience across market cycles to build resilient portfolios for our clients. By combining strategic asset allocation with access to private market opportunities, once available only to institutional investors, we help individuals and families across the GCC invest with confidence. This approach offers greater resilience amid ongoing market shifts. If you're rethinking your asset allocation strategy, contact our team for guidance tailored to your needs. About The Family Office The Family Office Company B.S.C. (c) in Bahrain and Dubai, its Riyadh-based wealth manager, The Family Office International Investment Company, and its investment advisory firm in Kuwait, The Family Office Investment Advisory Company (Kuwait) K.S.C. (c) are regulated by the Central Bank of Bahrain, the Dubai Financial Services Authority, the Capital Market Authority of Saudi Arabia, and the Capital Markets Authority of Kuwait. Serving hundreds of families and individuals, the firm helps clients achieve their wealth goals through custom-made investment strategies that cater to their unique needs. Disclaimer Certain services and products offered by The Family Office may not be available to investors in certain jurisdictions where they reside. Investors are responsible for ensuring compliance with local laws and regulations before accessing our products or services. The Family Office Company B.S.C. (c) is a Category 1 Investment Firm regulated by the Central Bank of Bahrain. C.R. No. 53871 dated 21/6/2004. Paid Up Capital: US$10,000,000. The Family Office Company B.S.C. (c) only offers products and services to 'accredited investors' as defined by the Central Bank of Bahrain. The Family Office International Investment is a joint stock closed company owned by one person. Paid-up capital SR20 million. CR No. 101060698, Unified National Number 7007701696. Licensed by the Capital Market Authority (no. 17-182-30) to carry out arranging, advisory and managing investments and operating funds, with respect to securities. The Family Office Company B.S.C. (c) (DIFC Branch) is a recognized company in the Dubai International Financial Centre (DIFC) under registration number 6567 and regulated by the Dubai Financial Services Authority (DFSA) as a Category 4 licensee to carry out Arranging and Advising Services. The Family Office Company B.S.C. (c) (DIFC Branch) is not permitted to deal with Retail Clients (as defined in DFSA's Conduct of Business Module).

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