Constructing a portfolio

A Stratified Approach To Risk Management

Stratified Risk is the term we use to describe how we approach the construction of a portfolio which meets a particular client's

  • Needs
  • Objectives
  • Attitudes

The classic problem is that these three factors can all imply diametrically different approaches. So, we start by analysing them and discussing with clients any inconsistencies; even trying to tease out requirements they did not realise they had, or attitudes to investment born of ignorance, or fear, rather than a true appreciation of the investment markets and the risks they carry. Only then do we embark on portfolio construction.

Our preference is to avoid such pitfalls as categorising a person as High Risk, or Low Risk. These are blunt instruments aimed more at satisfying the investment manager's compliance and administration needs than controlling the investor's risks. We seek to work out which of our Strategies is appropriate to each part of the investor's wealth.

A Diversified approach may be appropriate for a personal pension scheme to provide reliable growing pension. One or more Specialist Strategies may apply for a part of the investor's personal capital where the investor is willing to tolerate greater capital volatility and regards capital growth and taxation as the main priorities. A portfolio may be completed with Strategic Cash to meet a known future capital commitment and provide some readily accessible rainy day money.

The various Strategies provide discrete strata, each with different risk characteristics. Together they should give a blended risk profile which best suits the investor's needs, objectives and attitudes.

We have developed a system to enable this blending to occur in a controlled fashion. It applies a rating to each Strategy which reflects the inherent risk. This allows an overall risk to be calculated as an amalgam of the individual ratings. Like all such single number risk ratings, this should be viewed with caution; but, for us, it is the simplest guide to whether the stratified portfolio gives an acceptable blend of risk and return.

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Whitefoord LLP is authorised and regulated by the Financial Conduct Authority ( Financial Services Register No: 517235