Fundamental to our investment approach, is assessing how much loss a client is prepared to tolerate. Investors rational decision making capabilities typically weaken as portfolio losses greater than they had expected and have a tolerance for, start to accumulate. A portfolio approach which can provide protection from unexpected levels of losses beyond a clients risk tolerance, helps to prevent irrational investment decisions (e.g. selling low).
We then work with clients to assess the difference between the returns they require (e.g. to provide for their liabilities and assist future generations) and the returns they might be seeking (e.g. the returns they would like for reasons often not understood). Differentiating between the two will help clients make sensible decisions regarding their return objective.
Once a clients risk tolerance and return objective are established, the initial investment decision is to determine their portfolio weighting across three risk strategies we utilise: Preservation, Absolute Return and Conviction. The Preservation strategy targets a low risk of any loss, while seeking returns of 1.5% above inflation over rolling 1 to 3 year periods. The Absolute Return strategy targets a low risk of material loss, while seeking returns of 5% above inflation over rolling 5 to 7 year periods. The Conviction strategy requires a tolerance for substantial losses over the shorter and medium term, while seeking returns in excess of 6% above inflation over rolling 7 to 10 year periods.
We then conduct extensive due diligence in order to select the suite of investments we believe will best achieve the risk and return objectives for each risk strategy. Investments will be predominantly made through specialist investment managers, along with a select use of Exchange Traded Funds.
Adjusting a clients portfolio weighting across the risk strategies or making changes to the investments selected within each strategy, will be assessed on a quarterly basis (or as required). We have a strong bias towards "thoughtful inertia" before recommending any portfolio changes.