As investors, we expose ourselves to uncertainty. We do this with the ultimate goal of achieving financial gains that make it worthwhile. But we also want to remain within our own risk tolerance, which is the amount of loss we think we can endure without being driven to change our market exposure.
Our new special report looks at how portfolios may benefit from systematic downside protection. Asymmetric strategies (as achieved through an option-based hedging programme) can allow more potential upside for a given portfolio risk, enhance the reliability of returns and facilitate consistent portfolio goal-setting.
The report also considers individual risk tolerance, the importance of distinguishing uncertainty from risk, the nature of recent market crises, and current challenges to investor perceptions.
Key takeaways:
- We want to convert our risk tolerance into a source of opportunity. In doing that, we will always face uncertainty around market events and their timing. Adherence to strong convictions as events unfold can lead us to deviate from our investment objectives, potentially triggering undesirable market timing mistakes.
- Consciously separating uncertainty (which we accept as a source of potential opportunity and loss) from risk (which we want to avoid taking on excessively) helps investors to take more efficient risk management decisions.
- Systematic downside protection can be used to allow us to remain within risk tolerance levels, while extending upside exposure as far as possible.
