Risk Management

Protecting, preserving, and growing value


Risk Management

At Avanta Investment Management Limited, we are upfront about risks. However great an investment manager or professional investor is, there are times that, whether it is in their control or not, investments they make are negatively affected by risk.

The truth of the matter is that all investments carry an element of risk.

Equities, bonds, mutual funds, and ETFs can lose some or all of their value if market conditions go against them. Even ‘safe’ investments such as certificates of deposit come with inflation risks and may not keep pace with a rising cost of living.

Just because risk cannot be totally avoided does not mean that proactive action can’t significantly reduce the chances of loss.

At Avanta Investment Management Limited, we have a raft of measures in place to ensure that investments are protected, and their value is safeguarded and preserved so that they can grow to their full potential.

There are also some core concepts to understand related to investment risk.

Risk versus Reward.

The level of risk associated with a specific investment or asset class generally correlates to the level of potential return. The reasoning behind this relationship is that investors willing to make high-risk investments and possibly lose money should be rewarded for taking more risk.

Time

The longer you are invested in the financial markets, the more peaks and troughs you will experience. Over a longer time frame, these tend to at least cancel each other out and is one reason why we consider investing as a medium to long-term endeavor.

While we cannot eliminate risk entirely, there are ways that we can reduce any negative impact.

Asset Allocation

By creating portfolios that combine investments from different asset classes, such as equities, bonds, alternatives, or cash, we improve the likelihood that one or more class will balance out any downturn in other classes. To put it another way, we reduce the risk of significant losses from over-exposure to a single asset class, however positive our outlook on that asset class may be.

Diversification

Don’t put all your eggs in one basket is an adage many will know. By diversifying, we spread investments within each asset class across several different areas, sectors, industries, or even countries. This means, similarly to asset allocation, that if one industry (e.g., airlines) is going through a difficult time, there will be another industry (e.g., online retail) that at least balances it out.

Hedging

Hedging is a risk management strategy used to offset losses in investments by taking a contrary position in another asset. The decrease in risk provided by hedging can also lead to a reduction in potential profits. Hedging typically uses derivatives, such as options and futures contracts, or short selling, which can be considered high-risk and may not be appropriate for all clients.

The bottom line is that all investments involve some element of risk. Still, by better understanding the nature of risk and taking proactive measures to mitigate those risks, you will always be in a much better position to achieve your financial goals.