As an example, scenario analysis—applying factor analysis to assess how today’s investment portfolio would likely behave if events were to unfold similar to previous market downturns—is an invaluable tool in assessing the resilience of portfolios under extreme events.
Races Are Won In The Corners
Anyone can accelerate in the straightaways to gain the initial advantage in a race. But most races are won by the drivers who know how to navigate the corners with precision. The ones who slow down react to the car’s movements and focus on stabilizing their car so that they can accelerate out of the corner with as much momentum as possible. They win because they understand that the exit from the corner is just as important as the entry—if not more so.
Similarly, it is short sighted for advisors to focus solely on returns while paying short shrift to identifying, assessing and mitigating risk. Risk and performance must be linked together at all stages of the investment journey for clients to maximize the chances of achieving their goals, and financial advisors must be as exacting and diligent in building out their risk management capabilities as they are in pursuing growth.
Dr. Andrew Aziz is executive vice president of d1g1t, an enterprise wealth management platform powered by institutional-grade analytics and risk management tools for family offices and high-net-worth-focused RIA firms.